Raj was a person who held relationship at a higher pedestal than anything else. He would go out of the way to help people who he knew. Suraj, one of his colleagues who had over the years turned into a good friend approached him for becoming a co-applicant. Raj happily agreed to be the co-applicant when he got a confirmation from Suraj that the EMIs would, in any case, be paid from his account and he will not have to give even a single cheque to the lender. Little did he know that his endeavour to help Suraj was going to land him into a very hard time.
Due to a medical emergency, Suraj's finances came under stress and he stopped paying the EMIs. The collectors started to call Raj as well and appraised him that if he does not pay his name would reflect in the loan defaulter list.
Relations matter a lot in life and there would be times when you would oblige by saying a yes despite in heart you had wanted to say no. But if requests from friends or relations is to have you sign as a co applicant for a loan, then you need to think twice (thrice would be even better). And if you had in past taken that plunge and had signed on the form, you must pray for not getting to face a situation when the main applicant is not in a position to pay.
Let us understand this co-applicant business in detail.
The lending institutions ask for a co-applicant or a guarantor only in two situations. First, when they have a doubt on the repayment capacity of the borrower. To understand this better, either the borrower may be inching close to the debt burden ratio or maybe his bank accounts have poor balances. Second, when the lender has a question mark on the intentions of the borrower to repay. Put it simply, there has had default on other loans in past or there are bounces in the bank statement.
In all the above situations, becoming a co-applicant is full of risk.
As a co-applicant, you would be equally liable to pay the loan. Let us understand from the example cited above. In case Suraj fails to pay the loan Raj would be liable to repay it in full. The repayment would include not just the principal amount but even the interest, late payment charges or any other penalty accrued due to default.
Even in case of the home loan where the co applicants are common and the housing finance company insists to have all owners to sign giving the plea that it will safe guard all owners’ interest, the fact remains that in case of default the co-applicant would be liable for full amount of loan and not just for the proportion of the ownership.
Honestly speaking there is little recourse if the person for whom you signed as co-applicant gets into a situation of not paying the EMIs. If you do not pay, then the default will also get updated into your CIBIL report. However, following are the measure that possibly can help you out:
While you can follow the above if you have signed and the main borrower has seized to repay, it is highly important that one thinks through and weighs the possible scenarios before signing on as the co-applicant.