A joint loan is a borrowing sum that needs at least two people for approval. All parties involved in the agreement promise to repay the loan. Each borrower is accountable for the payment of partial or whole sums of money in case of default by others. Like any other loan, a joint loan can be secured and unsecured, with the only difference being that it involves more than one borrower.
Joint loans are usually preferred when you borrow a large sum and your income is not enough to get the nod. At the time of applying for a joint loan, both borrowers will have to fill in particulars and submit their income records. A credit check is part of an affordability check, so your lender would make hard inquiries on the credit reports of both of you.
As you fill in joint loan applications, a lender will assess your repaying capacity based on your combined income. It paves the way for borrowing more than you could individually.
There are various types of loans that you can apply for jointly, such as secured loans, unsecured loans, and mortgages. Secured loans are subject to collateral. In most cases, your house will be regarded as a security. In case both of you fail to clear your dues, you will lose your house.
Unsecured loans are not subject to any collateral, but the borrowing sum will be smaller than secured loans. Mortgages are the largest loans. If your income is insufficient, you can apply with your partner jointly to get approval without any hassle.
Emergency loans like payday loans and text loans do not offer joint applications. If you have been refused because of your poor income or credit score, you cannot apply for them with someone else on your application.
Most often, borrowers seek joint loans when they need a more considerable sum or have been refused because of their poor credit rating. If one of you has a poor credit score, you are likely to get approval for a joint loan, but lenders might restrict the borrowing sum.
As you are also responsible for paying back the total debt, in case the other borrower fails or refuses to pay off, you will still be perceived as a high-default borrower. In order to offset the default risk, your lender will put a higher interest rate.
Here are some of the pros and cons of joint loans:
A joint loan application combines your income, so chances are you get approval for a larger sum of money. However, this is possible when you both have a very good credit rating. Lenders might cap a smaller sum if you have a less-than-impressive credit report.
As you are both joint owners of the loan, you are responsible for making payments. If any of you are facing tough times, for instance, you lose your job, your partner may pay down the instalments. This is how you can avoid falling behind on payments, accrued interest, and late payment fees.
With combined income, you can easily prove that your repaying capacity is stronger. It will be suitable for you to acquire the immature light from your lender. When both of you have a stellar credit rating, it will raise your approval chances further. Interest rates will also be lower.
Although there is a way to get the nod for a joint loan when one of you has a less-than-stellar credit rating, you should avoid linking your credit score to someone with a bad credit rating.
Avoid taking out a loan with your partner with a bad credit rating. This may harm your credit score. The probability of obtaining approval for a loan in the future could be affected.
If any one of you does not have an impressive credit history, you might be refused, or if approved, your loan will be very expensive. Your lender will assess higher interest rates, and you may find it hard to pay back on time.
If one of you makes a default, your lender will reach out to another to clear the dues. Despite the payment, this will negatively influence the credit rating of both of you. It means you both will struggle to borrow money down the track.
Both parties are still liable if you part ways. If one of you dies, the surviving members will be liable to clear the dues provided the estate of the deceased cannot cover that money.
Once you have taken out a joint loan, you will remain financially linked even if you have broken up. Try to clear the dues first, and then you should untangle other finances. Do not forget to check your credit report to see if there is any other joint account. Communicate with the credit reference agency if you find any discrepancies.
A joint loan can be beneficial when you want to borrow a larger sum. Nevertheless, you need to be familiar with the risks involved. If your partner refuses or fails to pay off, you will have to foot the entire debt. Unfortunately, this will impact your credit score and the possibility of getting money down the line.
You should take out a joint loan only when you both have a good credit score and are sure about both repayment capacities. Before you take out a loan, compare interest rates, as they may vary by lender.
Jennifer Powell embraced finance writing just the moment she started working as a finance executive with EasyCheapLoan, which is a direct lender in the industry. Jennifer has an exceptionally keen eye for details and used her skills to pen down numerous blogs and articles on finance. When asked, she simply replies with a look on her face that shows how genuinely she cares for people struggling with financial problems. Jennifer works dedicatedly as a finance professional and considers sharing both her experiences and knowledge to increase the financial literacy of people and businesses.