Joint Loans
Loans are a common financial tool which many people use at some point in their lives. You might need to borrow some cash to tide you over if you’re buying a new car, doing some home renovations, or covering expenses which appear out of the blue.
However, if a situation arises where you need to borrow a significant sum of money, you might not be able to qualify for a loan on your own for a variety of reasons. This is where joint loans can come in handy.
In this article, we’ll explore the ins and outs of joint loans. We’ll investigate how they work, who can apply for them, and what to consider before taking the plunge on a joint loan.
Whether you're a beginner to personal finance or looking to expand your understanding, this article will help you grasp the basics of joint loans.
What is a Joint Loan?
A joint loan is a type of loan which two or more people apply to take out together. In a nutshell, this means that each person who has jointly applied for the loan is equally responsible for making repayments on it.
This also means that the outcome of your loan application is based on the income and credit record of all individual applicants, not just yourself.
Joint loans can be taken out for all manner of reasons as they are highly flexible. This could include things like home renovations, consolidating debt, or buying cars.
The primary advantage of choosing to take out a joint loan as opposed to another type of personal loan is that a couple of people applying can often increase your chances of getting approved.
This is because lenders consider the combined repayment capacity of all applicants, subsequently lowering the risk of applicants defaulting on the repayment schedule.
However, it's important to note that because each applicant is equally responsible for repaying the loan, one person defaulting means that the other joint applicants will be held responsible for remunerating the lender for full sum.
Who can apply for a Joint Loan?
Generally, anybody who can meet the criteria for borrowing which is drawn up by the lender is able to apply for a joint loan.
With this being said, joint loans are usually taken out by couples, family members, or business partners who want to borrow cash together as you’ll want to know the person, or people, pretty well before entering into a binding agreement such as this.
Married or cohabiting couples might apply for a joint loan to fund the purchase of a home, a vehicle, or another large purchase which they want to make together.
Parents and children, or other combinations of family members, might also team up to obtain a loan to cover things like education costs.
Furthermore, partners involved in a collaborative business venture could apply for a joint loan to cover their operational overheads, or to invest in new premises.
Prospective borrowers should bear in mind that different lenders have varying rules for their joint loan products.
Some lenders prefer joint loan applicants to live at the same address. Others will ask for details surrounding the relationship between all individuals applying for a loan together.
For this reason, it’s important to shop around for a lender whose requirements fit with your personal situation.
What is the process of applying for a Joint Loan?
The process of applying for a joint loan is largely the same as applying for any other type of loan, which makes it easier to get your head around.
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Prior to starting your application for a joint loan, it's a good idea for all involved to double check their credit history and score to make sure they’re in good shape. As a rule of thumb, the higher your credit scores, the greater your chances are of getting approved for a joint loan.
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Once you've all checked your credit history, you can begin researching lenders who offer joint loans. This step is easy as many lenders post their best offers and a list of services online. You can also ask around for recommendations among your friends and family, or pay a visit to your local bank or credit union to find out what they could offer you.
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To successfully apply for a joint loan, all parties will need to provide the lender with some documentation. Things which a lender may ask for include proof of income, tax returns if you have them, up-to-date bank statements, or identification such as a passport.
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Once you've chosen a lender and gathered all the necessary documentation together, you are now in a position where you can apply for a joint loan. As part of the application form, you'll be asked to provide information about all applicants to help your lender make their final decision.
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Once the steps above have all been completed, your prospective lender will consider your application and make a final decision on whether to approve the loan you’ve requested. If your party get approved for a joint loan, you'll then receive details regarding the loan terms. This will share further information about the interest rate which you’ll pay, the repayment period, and the sum of each borrower’s monthly repayments.
All loans are different, and the process of applying for a joint loan might vary depending on which lender you end up going with.
It’s a good idea to make sure you read the terms and conditions and ask any burning questions you might have prior to all applicants signing the loan agreement.
What are the advantages of taking out a Joint Loan?
Increased borrowing power
By taking out a joint loan, you can combine your party’s income and credit scores, which can increase your borrowing power.
This means that you may be able to secure a larger loan or better interest rates than you would be able to get with an individual loan.
Shared responsibility
The responsibility for repaying a joint loan is shared between all borrowers making a joint application. The good news is that this can help mitigate the burden for paying it back on each individual borrower.
Overall, taking out this type of loan can make your repayments easier to manage alongside other budgeting.
Equal ownership
Under some circumstances, taking out a joint loan can be the best option for couples or business partners who are looking to make a joint investment.
In taking out a joint loan, both parties involved have equal ownership in an investment and are then able to share in any profits or benefits which result from the loan’s investment in something.
Using a joint loan to embark on ventures like home renovations, for example, ensure a couple has an equal stake in a property.
Improved credit score
If you or one of your fellow borrowers has a low credit score, taking out a joint loan with somebody who has got a better credit score could work to improve the average credit score of the group.
When looking to take out loans in the future, this can help the borrowers with lower scores secure better rates of interest and loan terms on products they might access on their own.
What happens if the relationship between two people who have taken out a Joint Loan together breaks down?
If the personal relationship between individuals who have taken out a joint loan together breaks down, the situation can quickly become complicated. There are a few different scenarios which might play out as a result.
Scenario One - The joint loan is fully repaid with no hitches. In this situation, the joint loan agreement is no longer active as each party has fulfilled their responsibilities and everyone involved is able to move on.
Scenario Two - One borrower agrees to take over the whole loan, as they’re in a position to do so.
This individual then takes on sole responsibility for repaying the loan in its entirety. This might mean that you choose to refinance the loan, or even negotiate with the lender to remove the other borrower from the agreement altogether.
Lenders are likely to work with you on this, as ultimately their main priority is ensuring that they’re remunerated for any funds you’ve borrowed.
Scenario Three - All parties who have borrowed cash continue sharing responsibility for the joint loan.
If there are no borrowers who are able or willing to take over the entirety of the loan, then it may be necessary to keep sharing the burden for paying it back. On occasions, this outcome can be difficult if relations between the borrowers are unstable.
If this is the case, you may need to seek some legal mediation, or ask a solicitor to re-establish the terms of repayment for each party.
Scenario Four - One borrower defaults on their share of loan repayments.
If they aren’t able to contribute their share of monthly payments to the lender, this will mean that any other borrowers who took out the joint loan are still responsible for covering the difference.
Naturally, this scenario can put a strain on the relationship between all borrowers involved.
As is the case with scenario three, attaining a positive outcome for the remaining parties may require legal intervention to enforce repayment, or establish a brand-new agreement in light of the situation.
In general, it's important for borrowers who are considering taking out a joint loan to closely consider the potential risks and benefits of this type of financial product.
Having a clear plan in place for how to move forward with the loan if the relationship between the borrowers breaks down helps give everyone involved, including the lender, peace of mind.