You must be familiar with the most common type of joint loan: a mortgage taken by you and your spouse. However, joint personal loans are also common among people who cannot secure a deal due to less-than-stellar credit scores.
Joint personal loans are a sum of money that you borrow from a lender with another applicant who can be your significant other or any other family member. These loans are aimed at helping subprime borrowers who need money, but their poor credit report has called their credibility into question.
These loans work the same as a standard personal loan. Once the credit rating of both applicants is fetched from a credit agency and your income is perused, your lender will transfer money to your account that you will pay down in instalments. Each instalment will be amortised in nature.
Since your co-applicant has an excellent credit score, you will likely get the loan at a competitive interest rate, but there are loads of things you might not be aware of these loans. Before you take the plunge, you should get down to the nitty-gritty of these loans.
- You are both jointly responsible for the repayment of the loan
If you and your spouse have taken out a personal loan, you will split up the cost, but according to your agreement, you are both absolutely accountable for the settlement of the whole of the debt. In case your partner becomes cash-starved, you will be held responsible for paying down the entire instalment.
You should also look over your financial situation on the grounds of full loan settlement so you do not fall behind on payments. Take into account the soaring cost of living as well if you have an extended loan term.
- Your credit file will be linked to your partner’s
As you are both connected to a loan, your credit report will also be linked to your partner’s credit file, and it may have an impact on your borrowing ability down the line. Bear in mind that your credit score is influenced by your previous credit performance. If you owe a lot of money, you will end up with expensive deals.
Even if you have both successfully cleared your joint personal loan, your chances of getting attractive interest rates are bleak. However, that is the case when you try to take out, say, no guarantor loans from a direct lender when there is no considerable lapse of time.
Remember that the fallout from linking your credit file to someone whose credit rating is not up to snuff is poor borrowing ability. Despite having settled the loan, the impact of their bad credit rating can influence the decision. You might be turned down for a loan, or if you get the nod, high-interest rates will be levied.
- Missed payments will show up on the credit files of both
It is vital to note that your lender will inform credit bureaus about your timely payments, missed payments and defaults. As you are jointly responsible for the settlement of dues, your lender can seek the full payment from the other when one of you is in the red.
Even though the installment was made entirely by one of you, missed payments will be recorded on both of your credit files. Not to mention, you both will lose your credit points when you both refuse or fail to pay down an instalment.
In fact, when you apply for a joint personal loan, a lender will run a hard credit check on both applicants. Hard inquiries will temporarily ding credit points off you both. You will bounce back when you start making payments.
- You can flinch from payments when your partner dies
In the unfortunate event of death, you cannot expect yourself to be off the hook for half of the cost to be borne by your partner. Having said that, both applicants will ultimately be responsible for the whole debt; death cannot let you avoid your obligation. You are deemed to bear the entire cost of the debt.
- Joint loans for consolidation are not economical
Joint personal loans are mainly used for consolidating your outstanding debts. Wise up to the fact that the repayment length of your loan could be extended, which means your monthly payments will be smaller but you will end up paying a lot more in total.
Interest rates will naturally be high when you use joint personal loans for consolidating your current debts.
How a joint loan is different from a loan with a co-signer or guarantor
Many people confuse co-borrowing with co-signing, but they are both different. The following table highlights the difference between both:
|Responsible for partial or whole settlement of the debt as co-borrower also used the debt.
|Legally responsible for payments only when the borrower makes a default.
|Shares equal responsibility for missed payments, defaults and settlements.
|Guarantees a lender for the benefit of a borrower and promises to take up repayments when the borrower fails or refuses.
|A co-applicant can use funds
|A co-signer or guarantor can use not a single penny of a loan.
|Credit rating is affected at the time of application and timely payments.
|No credit score is pulled at the time of application. A credit score is affected only when a borrower fails to clear the dues.
The bottom line
Joint personal loans can help you take on money when your credit rating is bad, but they are also subject to some risks. You should be responsible while deciding on these loans. Calculate all associated risks and then arrive at a decision.