Co-signing a personal loan can feel like helping someone you trust —a friend, family member, or colleague—take out a personal loan. Whether it’s for managing expenses, consolidating debt, or funding a big purchase, being a co-signer allows someone with a lower credit score or limited credit history to get a loan they might not qualify for on their own.

However, co-signing isn’t just a goodwill gesture — it comes with responsibilities and potential risks. In this blog, we’ll explain what co-signing a personal loan means, its key benefits, and the possible risks you should consider before saying yes. We’ll also share practical tips to protect your financial health while helping someone secure a loan responsibly.

What Does it Mean to Co-Sign a Personal Loan?

A co-signer is a person who agrees to pay back the personal loan in case the primary borrower fails to repay. When you co-sign a personal loan, you take the legal responsibility of loan repayment if the primary borrower fails to pay.

A co-signer can be a parent, sibling, or friend with a stronger credit profile. The co-signer does not receive the borrowed money or have direct control over the use. Their role is simply being the guarantor.

Role of Co-Signer in Personal Loan

Here is a role that a co-signer plays in a personal loan:

• Acts as a Guarantor: The co-signer is legally bound to make the loan repayment in case the borrower does not.
• Improves Creditworthiness: Co-signer’s credit profile and income increase the likelihood of the borrower getting a loan.
• Get Favourable Conditions: A co-signer helps the primary borrower to obtain lower interest rates or higher loan limits.
• Access to Personal Loan: The primary borrower with a poor CIBIL score, an unstable income or a poor credit history can add a co-signer to get easy access to funding.

A co-signer is different from a co-borrower (or co-applicant). A co-borrower shares liability and benefit/usage as part of the loan from the start. A co-signer, on the other hand, often has a “standby” role. They are liable to repay the loan only when the primary borrower fails.

Benefits of Having a Co-Signer on Your Personal Loan

Here are the key benefits of having a co-signer on your personal loan application:

• Improved Approval Chances: A co-signer with a stronger credit score (750+) and history raises your chances of approval.
• Better Loan Terms: Even if you have a poor credit score, the presence of a co-signer improves your chances of getting a larger loan amount, a low interest rate and a more flexible tenure.
• Build Credit History: Both parties’ credit scores benefit from timely repayments, particularly for those who are new to credit.

Risks Involved in Co-signing a Personal Loan

Here are the key risks of becoming a co-signer for a personal loan you must know before agreeing to become one:

• Shared Liability to Repayment: A co-signer is liable to pay the personal loan if the primary borrower fails to repay.
• Impact on Credit Score: The credit score and history of both parties will be impacted directly by any late or defaulted EMI payments.
• Impact on Future Loans: Due to increased overall liabilities, a personal loan increases the co-signer’s total debt and may make it more difficult for them to obtain future loans until the previous loan is fully repaid.

Tips to Minimise Risks when Co-signing for a Personal Loan

Here are the tips you can follow to minimise risks when co-signing a personal loan:

• Assess the Repayment Ability of the Borrower: Co-sign only when you are sure that the primary borrower has a good income and a good repayment history.
• Read the Loan Agreement: Understand the terms of repayment, the tenure, the interest rate and your legal responsibility as a co-signer.
• Maintain Open Communication: Keep track of the payment dates and ensure that EMIs are paid on time.
• Turn on Payment Reminders: If the bank or NBFCs provide the facility, request them for a joint notification to track EMI payment or delays.
• Retain a Copy of Every Document: Retain a copy of the loan agreement, repayment receipts, and correspondence with the lender.
• Establish Limits: Avoid co-signing several loans at the same time to safeguard your borrowing power.

Key Factors a Lender Checks in a Co-Signer

Here are the key factors that a lender checks when assessing a personal loan co-signer:

• Strong Credit Score: Lenders (Banks and NBFCs) take a strong credit score as an indication of creditworthiness. A strong CIBIL score improves the chances of loan approval.
• Age: In order to legally enter into the loan agreement, the co-signer must be between 23-52.
• Low Debt-to-Income Ratio (DTI): Lenders prefer co-signers whose income easily covers their current debts to reduce risk.
• Stable Income: You must have a steady job or regular business income to show that you can comfortably repay the loan.

Co-signing a personal loan can be a helpful way to support someone’s financial needs, especially if they have a poor credit history or low income. However, it’s a decision that carries real financial responsibility. Before agreeing, carefully assess the borrower’s repayment capacity, understand the loan terms, and be aware of how it could impact your own credit and borrowing power.

Looking to apply for a personal loan? At DMI Finance, we offer personal loans with attractive interest rates and flexible repayment tenure. Apply for a personal loan via DMI Finance to meet all your financial needs.

Frequently Asked Questions (FAQs)

1. What documents are needed for a co-signer’s personal loan?

Along with income proofs like salary slips or an income tax return (ITR), the borrower and co-signer are required to submit KYC (Know Your Customer) documents like Aadhaar, PAN, and proof of address.

2. Can I co-sign a personal loan if I already have an ongoing loan or EMI?

Yes, you can co-sign a personal loan with existing debt, but lenders will review your total obligations to ensure your Debt-to-Income Ratio (DTI) stays below 40% to 50%.

3. Does the co-signer need to be from the same city or state?

No, a co-signer does not need to be from the same city or state, but it can facilitate simpler documentation and quicker verification.

4. Can students or self-employed individuals have a co-signer?

Yes, both students and self-employed individuals can add a co-signer if they have a poor credit score or no credit history.

5. Is co-signing allowed for online personal loans?

Yes, many lenders now allow co-signers even for online personal loans. The entire process, from verification to signing, can be completed digitally using Aadhaar-based eSign.

6. What happens to a co-signer’s liability if the borrower passes away?

The co-signer remains legally responsible for repaying the outstanding loan unless the loan has insurance coverage.

7. Can a co-signer help improve the borrower’s credit score faster?

Yes, if repayments are made on time, both the borrower and the co-signer can see a positive credit impact. Timely EMIs build repayment credibility.

8. Are co-signers eligible for tax benefits?

In general, no. Depending on the type of loan, only the principal borrower may claim tax deductions if the funds are used for business purposes.

9. What precautions should a co-signer take before signing?

Pay close attention to the loan agreement’s provisions regarding default, penalties, and release options. To stay informed, it’s a good idea to set up alerts or joint notifications for EMI payments.

10. Can I withdraw as a co-signer before the loan ends?

Usually not, unless the borrower refinances or makes full repayment of the loan. Co-signer substitution may be permitted by certain lenders following improved borrower credit and a history of on-time payments.