What Is The Difference Between A Co-Signer And Co-Applicant In Business Loans?

Many borrowers, with inadequate income or no credit history, may have difficulty in obtaining a loan. In these situations, another trusted individual, mostly from the family or among friends, can step forward and provide additional assurance to the lender that the loan will be paid.

While default on debt obligations cannot be predicted, the predicament can be slightly lessened by proper assessment and credit risk management. Loan defaults are scary for lenders as well as for people who are guarantors to loans.

A loan is an added responsibility and the guarantor must know that there are risks involved. Hence, speaking in terms of accountability, it is important to understand the terms co-signer and co-applicant.

Co-Signer And Co-Applicant

A co-signer is a person who jointly agrees to be legally responsible to pay off the debt, if in case the primary borrower does not pay back the loan as agreed. In this kind of arrangement, the main borrower who receives the loan will be responsible for payments. Co-signing on business loan documents helps borrowers with low income or minimal credit history to get a loan approved on negotiable terms.

A co-applicant or a co-borrower is a person who wants to take on a shared debt with another person. A co-applicant applies with the primary borrower for a loan and jointly shares the responsibility of paying the equated monthly installments (EMIs).

A guarantor can either be a co-signer or a co-applicant. Hence, to be well-informed it is good to know the differences between the two:

• Lending Terms:

Adding a co-applicant at the time of loan application improves the business loan eligibility criteria for a higher principal amount because of multiple borrowers. The lender thoroughly examines the income and credit history of each co-borrower to approve the loan.

A co-signer of a business loan is needed only when the primary borrower does not fit the eligibility criteria because of a low credit rating. So, an individual who guarantees a loan as a co-signer must have a high credit rating. A high credit score of the co-signer can help the primary borrower to avail loans at a lower interest rate.

• Repayment:

The repayment of the loan is the joint responsibility of the primary borrower and the co-applicant. But a co-signer is not responsible for paying any EMIs. A co-signer steps in only when the borrower is at default in making the loan repayment.

• Tax Benefits:

On a joint business loan, if the co-applicant happens to be the co-owner of the company or business, then the individual is eligible to avail tax benefits. A co-applicant who has no claim over the ownership title enjoys no tax benefits.

On the contrary, a co-signer does not enjoy any tax benefits.

• Ownership:

A co-borrower's name appears on all business loan documents. And both the primary borrower and the co-borrower will be the rightful owners of the property when the loan payments are completed. Co-signers usually do not come into the picture when ownership rights are concerned.

Considering Co-Signing Or Co-Applying A Business Loan?

Knowing that it is the primary borrower who will be paying back the loan and will be retaining the ownership of the asset, co-signing can be a wise decision. But if financial situations and personal equations change with the primary borrower, it is difficult to clear off the name as a co-signer. Repaying the outstanding amount is the only solution available. Also, any missed payment by the borrower will negatively affect the co-signer's credit score.

Co-borrowing is best for joint business loans on shared property or business ventures.

Conclusion

In a business the need for money can arise any time. Helping a family member or a friend is good but it may have consequences beyond one’s anticipation. Co-signing on someone else’s business loan documents can be risky. But if there is a co-owner or business partner who is ready to divide the responsibility of repayment equally, then co-borrowing is the best. If defaulted, both parties are equally responsible.

Usually, a co-signer is a friend or family member, with a good credit history and a solid income. Such individuals should be careful while choosing to be a co-applicant or a co-signer. It is also important for a primary borrower to weigh both the pros and cons and choose between a co-applicant or a co-signer.

Once the decision is made, it is time for a loan application. IIFL Finance offers a host of business loans to individuals and organizations like a partnership firm, private limited company, etc. Applicants can use the website to use the eligibility calculator and know the loan amount while applying for a joint business loan with a co-applicant.