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A joint loan isn't a particular type of loan but instead the process of co-borrowing a loan and sharing equal responsibility for the repayments with someone else. Because each applicant's credit scores, income and other factors are typically considered, it may be easier to qualify for a joint loan. But joint loans don't come without risks. Before you sign up, check out how joint loans work and other factors to consider before co-borrowing.
How Does a Joint Loan Work?
If you're buying a home, financing a car, paying for a wedding or making another large purchase, it can be tough coming up with the money you need to cover the bill. Without the savings to cover the cost, a loan may be necessary. If you think you won't qualify for the loan on your own, a joint loan may be a good option.
When you take out a joint loan, you are co-borrowing the funds—pooling your resources—with one person or more, such as family members, a partner or friend. You apply and get approved for the loan together and are equally responsible for making the loan payments. You also share joint ownership of the loan funds or the asset purchased with the loan.
Both your name and your co-borrower's name will appear on all loan documents. Instead of using only one applicant's income and credit information to meet the loan requirements, however, lenders use each applicant's income, credit history and other factors for approval. In the case of a mortgage, all names will appear on the property's title. The same applies to co-owning a vehicle or another asset.
Your lender may allow you and your co-borrower to prequalify for the loan. You'll see your rate, terms and monthly payment amount without it affecting your credit scores. Prequalifying also gives you the opportunity to compare offers to find the best loan for your needs.
Pros and Cons of Joint Loans
Before you apply for a joint loan, consider the benefits as well as the disadvantages.
Joint loans offer several advantages to borrowers who may have difficulty qualifying on their own.
- You can share the responsibility with another co-borrower. Since you and your co-borrower are both responsible for making the repayments on the loan, you don't have to cover the costs alone. Making on-time payments each month can also help boost both of your credit scores.
- You may have better approval odds. If you have less-than-stellar credit, low income or your debt-to-income ratio is high, you may have better odds of qualifying for a loan and securing a better deal with a co-borrower who has a higher credit score, higher income and lower debt-to-income ratio.
- You could qualify for a higher loan amount. Two or more incomes may help you qualify for a higher loan amount. That's because lenders have the added assurance you can meet the monthly payments and your debt will be repaid.
Although a joint loan with a co-borrower can make it easier to qualify for a loan or mortgage and possibly even boost your credit, it also has drawbacks to consider.
- You're both liable for the debt. Because both your name and your co-borrower's name are on the loan agreement or title, you share equal responsibility for the repayment of the loan. So, if your co-borrower can't (or won't) make the repayments, you accept full responsibility for repaying the entire debt. You'll also assume any late fees or collection costs.
- You may put your credit score at risk. With a joint loan, you are equally responsible for the loan repayments. If either you or your co-borrower falls behind on your payments, credit scores for both borrowers can take a hit. On the flip side, making on-time payments each month can boost credit scores for both account holders.
- You may find it hard to qualify for new credit. When you take out a joint loan, the amount of debt you owe increases, which raises your debt-to-income ratio even if you're not the one making the payments every month. This might reduce your chances of qualifying for new credit.
- You might lose a friend. Missing payments, or failing to pay the loan altogether or not living up to the requirements laid out in your agreement could impact your relationship and strain a friendship or marriage.
How Taking Out a Joint Loan Differs From Cosigning
Although co-borrowing and cosigning share some of the same responsibilities and risks, there are a few key differences. When you take out a joint loan, you're co-borrowing with one or more people, which means you have equal liability and ownership rights as co-borrowers. But cosigning only gives you liability for the repayments—not ownership.
For instance, someone without established credit may use a creditworthy cosigner on a loan. Although the cosigner is legally responsible to pay back the loan if the primary borrower cannot, they have no legal rights to the loan proceeds—but co-borrowers do.
|Cosigned Loan vs. Joint Loan|
|Legally responsible for repaying the debt||Generally work together to repay the debt|
|Guarantees the debt for the benefit of the primary borrower||Share equal responsibility for the debt|
|Has no legal right to the loan proceeds||Share the funds or asset purchased with the loan|
|Can build credit because the loan is on the cosigner's credit profile as well as the primary borrower's||Can benefit from boosted credit with on-time payments|
How Does a Joint Loan Affect Your Credit Score?
Depending on how you manage your joint loan, your credit can be either helped or hurt. Missing payments or defaulting on your loan can hurt both your credit score as well as your co-borrower's. That said, most lenders will only report late payments once they are at least 30 days past due. So, you have a bit of breathing room to bring your account current.
When you apply for a joint loan, your lender will perform a credit check that results in a hard credit inquiry for both applicants. This may cause a minor dip in both your credit score and your co-borrower's score. This is usually temporary, however, and the drop will lessen over time.
The Bottom Line
Taking out a joint loan with a buddy, partner or family member has some advantages over applying for a loan on your own. But it also comes with the risk of hurting your credit if you miss payments or default on the loan.
A high credit score can get you the best loan rates and terms, so check your credit score and report for free with Experian to see where you stand. You can also save yourself the time researching possible lenders by using Experian CreditMatch™, which allows you to compare loan offers personalized to your credit profile. Taking time to improve your credit before you take out a loan is the best way to secure good terms and a low interest rate.