You may have heard the term ‘joint loan’ before, also referred to as joint borrowing. But how do joint loans work? And what are the benefits of joint loans vs individual loans?
A joint loan is, as the name suggests, a loan that is taken out by multiple borrowers. Just as a joint checking account is shared between two or more people, a joint loan is shared by two or more borrowers. However, it’s important to note a key distinction–instead of just sharing access to an account, as with joint checking, the borrowers of a joint loan also share a legal obligation to pay back the loan.
There are several potential benefits and drawbacks to consider, so it’s important to understand how a joint loan works to determine whether or not it could be a viable solution for you.
How Do Joint Loans Work?
Joint loans work by using the credit of two or more borrowers instead of just one individual. If you were to take out a joint loan with your partner, for example, your partner would be your co-borrower and together you’d share the responsibility of the loan.
Joint loans are most common for mortgage and auto loans, though finding a lender that accepts personal joint loan applications is possible. The process of applying for a joint loan is like any other loan application, with the inclusion of an additional applicant.
Applying for a Joint Loan
Joint loan lenders will generally require information about all applicants involved in the loan, including:
- Personal information (addresses, dates of birth, Social Security numbers, etc.)
- Employment history
- Annual or monthly income
This information allows the lender to assess the eligibility of the applicants by checking credit scores, credit history reports and debt-to-income ratios.
What are the Benefits of Joint Loans?
Joint loans can have unique benefits in a few scenarios, including:
They’re Obtainable if You (or Your Co-Borrower) Has a Lower Credit Score
Since joint loans work by combining the credit of multiple borrowers, one low credit score can be balanced out by one or more higher credit scores, altogether delivering enough credit to secure a loan. This is a common reason for taking out a joint loan, especially among couples with differing credit scores.
They Can Build or Rebuild Credit
In conjunction with the previous benefit, being able to qualify for a joint loan gives an individual with poor or little credit history an opportunity to increase their credit score. Low credit scores are far from permanent–in fact, scores are always changing based on payment history, debts, and other factors. Successfully paying off a joint loan can help an unfavorable credit score.
Borrowers Can Qualify for Larger Loans or Lower Rates
In many cases, combining the credit of two or more borrowers will allow for a larger borrowing capacity, or the amount that can be borrowed, than just one borrower would have. Even with good credit, borrowing capacity is often somewhat constrained by income, debts, and open loans. Adding another borrower to the equation is a way to potentially work around these constraints and increase borrowing capacity.
Joint loans may also qualify for lower interest rates than individual loans, since there is less liability for the lender with two or more borrowers agreeing to take responsibility for repayment.
The Cost of Repayment Can Be Shared
Unlike an individual loan, the responsibility of a joint loan falls to multiple borrowers. If all borrowers contribute to the repayment of the loan, the cost becomes divided up, and repayment can be more affordable. Of course, this concept relies on all borrowers to act responsibly, which isn’t always the case. Which is why it’s also important to consider the potential disadvantages of joint loans.
What are Some Disadvantages of Joint Loans?
Applying for a joint loan shouldn’t be taken lightly. Although joint loans present several advantages, they also carry some potential disadvantages as well, such as:
You’re Liable for the Entire Loan
As a borrower, you’re responsible for repaying the loan even if your co-borrower(s) fail to contribute. If you are counting on your monthly loan payments to be divided two or more ways, you may struggle to take on this financial burden yourself.
Your Credit is on the Line
If you’re left without contributions from your co-borrower(s), your credit may dip if you’re unable to come up with full monthly payments. Missing or incomplete payments will affect the credit of all borrowers involved with the loan, even if it’s through no fault of your own.
Potential Strain on Relationships
If something goes wrong during the repayment of your joint loan, whether it’s your fault or that of your co-borrower(s), it may negatively impact your relationship. Because everyone’s credit is on the line, the actions or inactions of one borrower will affect the financial well-being of all other borrowers. The financial influence you’ll have on your co-borrower(s) is something everyone should consider before applying for a joint loan.
It May Be Harder to Quality for Future Financing
Once a loan is taken out, whether a joint loan or any other type of loan, it increases a borrower’s debt-to-income ratio. This may make it harder to qualify for loans in the future, and may come into play if the borrower ever needs to finance a new car or property.
The Difference Between a Joint Loan vs an Individual Loan or Co-Sign Loan
When two or more people take out a joint loan, they equally share the responsibility to pay back the loan amount as co-borrowers. When someone cosigns a loan taken out by another person, they offer their credit as added security to the lender. There are other important differences between a joint loan and one that has been co-signed.
While a co-signer lends only their good credit as a safety net for the lender, a co-borrower actually has their name on the loan agreement or title. A co-signer has no access to the loan money, while a co-borrower has full access. Lastly, a co-signer is responsible for repayment only if the borrower defaults, while a co-borrower is always responsible for repayment throughout the life of the loan.
Is a Joint Loan Right for You?
Using this information, you can decide for yourself whether or not a joint loan is in your best interest. To recap, a joint loan may be beneficial if a borrower has a weak credit score, wants to help somebody secure a loan or build credit, wants a larger borrowing capacity or lower interest rate, or is interested in dividing loan repayment costs. Alternatively, joint loans may present complications if a borrower becomes liable for the entire loan, gets their credit score damaged, has relationships strained, or is unable to qualify for future loans.
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This article is for informational purposes only. It is not intended to serve as legal, financial, investment or tax advice or indicate that a specific DCU product or service is right for you. For specific advice about your unique circumstances, you may wish to consult a financial professional.
