A co-applicant for an education loan is someone who applies for the loan jointly with the student. The lender checks the applicant's and the co-applicant's credit history before approving the loan. This helps the lender in reducing potential risk and improving loan approval rates. The co-applicant eases the way for students requiring finance for studies, especially when they do not have an independent source of finance.
This article explains who is a co-applicant in an education loan, the eligibility criteria, and the benefits of having a co-applicant.
Types of Co-Applicants in Education Loans
There are two main types of co-applicants in education loans:
- Financial Co-Applicant (Primary Co-Applicant):
This is usually the main income-earning individual responsible for repaying the loan if the student cannot. Typically, it’s a parent or legal guardian with a stable income. Lenders assess their credit score, income proof, and repayment capacity before approving the loan.
- Non-Financial Co-Applicant (Secondary or Additional Co-Applicant):
This can include family members like retired parents, siblings, or even extended relatives who may not have a regular income but are included for property ownership or asset-related documentation, especially in secured loans.
Why You Would Need a Co-Applicant
Now that we’ve understood who is a co-applicant in an education loan, let us understand their importance. Students may lack a credit history and a stable income source. Therefore, lenders insist on the addition of a co-applicant to ensure loan repayment. They offer an assurance for lenders in such a way that the loan will be repaid even if the student experiences future financial difficulties. However, having a co-applicant is not mandatory and may vary based on the lender’s policies and the borrower’s financial profile.
Who can be Eligible to be a Co-Applicant?
Some of the people who can be eligible to be a co-applicant are:
- Parents: Parents have been a preferred choice for lenders to be the joint applicants.
- Siblings: Brothers or sisters can be co-applicants. This is subject to their financial ability and willingness to take liability.
- Spouse: The spouse of the married students can be their co-applicant.
- Legal Guardian: If the parents are not available, a legal guardian can be a joint applicant. The guardian must meet the loan provider's conditions.
Eligibility of Co-Applicant for Education Loan
The co-applicant should fulfil some requirements:
- Should have a stable income so that they can repay.
- A good credit history is needed to enhance the chances of loan acceptance.
- Must present financial statements to demonstrate the ability to repay.
Responsibilities of a Co-applicant
Below are the key responsibilities of a co-applicant:
- Liability for Repayment: If the student defaults in repaying the loan, the co-applicant will have to bear the responsibility. They are legally bound to pay any outstanding loan amount.
- Effect on Credit Score: Default in payment has an impact on the credit score of the co-applicant. A default or late payment can damage future borrowing capacity.
- Submission of Documents: The co-applicant must present evidence of income, identity, and address. They are required for the release and approval of the loan.
Mandatory Requirement of a Co-Applicant
Most institutions require a co-applicant for education loans. This provides security for the loan and improves the likelihood of approval. Some institutions allow education loans without a co-applicant if the student has a good financial history. This is, however, uncommon, and the availability of a co-applicant significantly improves the eligibility for the loan.
Tax Advantage for a Co-Applicant
The co-applicant can avail of tax relief under Section 80E of the Income Tax Act. The tax deduction is on loan interest. The deduction can lighten the financial burden of loan repayment.
Effects of a Co-applicant's Default on Payment
If the co-applicant defaults on the loan, the financial institution has the legal right to recover dues. In such cases, the credit scores of both the borrower and the co-applicant may be affected in such a case. In extreme circumstances, loan providers may repossess the property if the loan is collateralised. It is thus crucial that co-applicants take into consideration their financial position before taking on the loan.
Selecting the Right Co-Applicant
Choose a financially secure individual with a good credit rating. This may increase the chances of loan approval.
- Make sure that the co-applicant is aware of the law and their obligations.
- Discuss repayment terms and future financial arrangements in advance to avoid financial problems in the future.
Conclusion
A co-applicant can be crucial to obtaining an education loan. The term co-applicant means in an education loan that a second person, usually a parent, guardian or spouse, joins the application to improve approval chances. They offer financing and increase the chances of getting a loan. Choosing the right co-applicant can make the loan process simpler. Individuals must also check co-applicant eligibility for an education loan before choosing their co-applicants.
If you’re planning to pursue education abroad and are concerned about finances, Credila provides education loans to study abroad with flexible repayments. Students and co-applicants must determine the terms of the loan, repayment schedule, and tax benefits before proceeding.
Disclaimer:
As of March 31, 2024. T&C apply.
Credila Financial Services Limited (Formerly known as HDFC Credila Financial Services Limited)
The education loan facility provided by Credila Financial Services Limited ('The Company') will be at the sole discretion of the Company and within the Company's prescribed credit and underwriting norms/guidelines prevailing at the time of processing and disbursing the education loan. The Company maintains the right to change the interest rate at any time and at its sole discretion, without prior notice.
