When you have credit or income problems, joint borrowing can help you qualify for loans that you cannot get on your own. Taking out a loan with someone else can also help you get lower interest rates and better terms. Of course, joint loans also have drawbacks. If you are considering adding a co-borrower to your loan application, it’s a good idea to understand the pros and cons upfront.
What is the joint loan?
Joint borrowing is the process of taking out a loan or other type of financing with another person, often referred to as a co-borrower. If your application is approved, the personal loan or joint credit card is issued to both of you and you are both legally responsible for paying off the debt. Joint loans can also impact your credit reports and credit scores.
How the joint loan works
To take out a loan with someone else, first find a lender who allows the joint loan. While joint personal loans are common in the mortgage and auto industries, finding lenders who allow joint loan applications. personal loans and credit card may be more difficult.
Once you have found a lender, you can submit a joint credit application. The lender or credit card issuer will likely ask you to provide general information for yourself and your co-borrower, such as:
- Personal identifying information (names, social security numbers, dates of birth, etc.)
- Work history (per person)
- Annual or monthly income (per person)
From there, the lender can check your credit reports and your credit scores. It can also look at your income against debts you already have (often referred to as your debt to income ratios) to see if together you are eligible for funding.
Why choose a solidarity loan?
Although everyone has their own motivations, consumers can apply for solidarity credit for several reasons. In some cases, applying for a loan from someone else can help you qualify for financing when you would not be alone. For example, joint personal loans are quite common among couples when one person has bad credit or when two incomes can help the couple qualify for a larger loan amount.
Apply for a joint loan with someone who has a excellent credit rating could also help you get lower interest rates or better terms. This is one of the reasons why parents can apply for joint personal loans with their children. Spousal loan can also be a way to help your child build credit for the first time.
However, co-borrowing comes with risks, so you may want to consider other options first. For example, add your child as Authorized user to your credit card could be an alternative to help them start building credit. When you can qualify for a loan without your spouse’s income or credit history, it’s usually best to stay independent.
How does a joint loan affect my credit rating?
When you co-borrow with someone else, the account may appear on all three of your credit reports and your co-borrower’s credit reports, depending on the lender’s credit policy. Any loan that shows up on your credit reports has the potential to have a positive or negative impact on your credit score.
Late payments on a joint account can damage your credit scores, possibly seriously. Still, a well-managed joint loan can help. improve your credit overtime. Ultimately, the impact of a joint loan on your credit scores primarily depends on how it shows up on your credit reports and how you manage the account.
Can you use your spouse’s income to get a personal loan?
If you want to use your spouse’s income for a personal loan, you can do so, but they must be registered as a co-applicant. Without registering your spouse as a co-applicant, only your personal income can be taken into account for a personal loan.
Registering your spouse as a co-applicant on a personal loan application has advantages and disadvantages. You must weigh the pros and cons before deciding to register your spouse as a co-borrower so that their income is taken into account in the approval or denial of your personal loan application.
Advantages and disadvantages of the joint loan
Any loan should be taken with some degree of consideration, but it is even more important to consider the pros and cons before taking out a joint loan.
Benefits of joint loan
- Better chances of qualifying (or getting a better deal). If you have credit or debt-to-income ratio issues, the right co-borrower could make a huge difference.
- Qualify for a larger loan amount. Even with good credit, your borrowing capacity is limited depending on your income and existing credit obligations. Adding a joint applicant to your loan application who earns an income separate from you could allow you to borrow more money.
- Build or rebuild your credit. A well-managed joint account could potentially help you improve your credit history and scores over time.
Disadvantages of joint loan
- Potential to be responsible for all debt. With a joint loan, you accept full responsibility for the debt. If your co-borrower can’t or won’t pay, the lender will always expect you to. For this reason, joint debts can be particularly difficult to navigate in the event of separation or divorce.
- Credit risk. If you fall behind on your payments, having a joint account could lower your credit rating.
- May be difficult to qualify for new funding. A new joint loan increases the amount of your debt, thus increasing your debt-to-income ratio. Even though the new account has a positive effect on your credit rating, it could reduce your borrowing capacity for future loans.
Should I consider a joint loan?
It’s usually best to avoid co-borrowing (and co-signing, for that matter) whenever possible. If you are considering a joint loan, first ask yourself the following questions:
- Can you or your potential co-borrower qualify for the loan without adding the other person as a co-borrower? If so, there may be little benefit to opening the account together.
- Is a co-borrower required to share ownership of an asset (such as a house or a car)? A joint loan may not be your only option. You can ask a lawyer to make sure both names appear on the title deed, even if only one person is taking out the loan.
Of course, it may sometimes be necessary to borrow jointly to qualify for the amount of money you are looking for. Depending on your situation, you may not be eligible for payments over a large amount home improvement loan or a mortgage with your income alone. If you decide to co-borrow with someone else, just make sure everyone understands the risks before signing on the dotted line.
Before you co-borrow, it’s important to do your homework, just like you would with any other type of loan. You can start with check your three credit reports for errors. Ideally, you and your co-borrower should take this step.
Then take the time to shopping for loans with several lenders. Compare interest rates, fees, repayment terms, and anything else that could affect the cost of your joint loan or the amount of your monthly payments. Once you and your co-borrower have all the information, you can choose the loan that best suits your situation.