What Is a Joint Loan?

How Does a Joint Loan Work?

When you apply for a loan by yourself, the lender will likely consider your credit score, income and debt-to-income ratio. If you’re approved, the account will be added to your credit reports, and you will be solely responsible for repaying the debt.

As the name implies, a joint loan has more than one borrower. Both co-borrowers have an equal claim to the loan proceeds or any asset that’s purchased with the loan—and the account will appear on both of their credit reports. That means they’re both responsible for paying it back. Joint loans are common when financing a big expense. That might include a:

• Home
• Car
• Wedding
• Home improvement project or home repair
• Medical emergency

Joint Loan vs. Cosigning

Taking out a joint loan isn’t the same thing as having someone cosign your loan. You might apply with a cosigner if you’re having trouble qualifying on your own. The lender will consider the cosigner’s income, credit score and debt-to-income ratio, which could boost your chances of getting approved.

The cosigner, who may be a family member or friend, is someone who essentially guarantees the debt: If you stop making your payments, they’re legally responsible for paying it back. But they won’t have access to the loan funds or any assets that are purchased with the loan.

When to Consider a Joint Loan

A joint loan might make sense if:

• You’re making a large purchase with another person. A mortgage is a good example of a joint loan. When buying a home with your partner, a joint home loan allows you to put both of your names on the mortgage and property title.
• You’re having trouble getting approved on your own. Whether you’re taking out a car loan or a personal loan, getting approved might be a challenge if you have a high debt-to-income ratio or less-than-perfect credit. Bringing on a co-borrower could make you a more attractive loan candidate.

Be aware that both co-borrowers are equally responsible for the debt. The account will appear on both of your credit reports—and if one person stops paying, you’ll have to assume the payments on your own. If not, you can expect a negative impact on your credit. On a positive note, making on-time payments can help improve both of your credit scores.

Pros and Cons of a Joint Loan

Joint loans have their benefits and drawbacks. Consider the following before taking out a loan with a co-borrower.

Pros

• It might be easier to get approved. When applying for a joint loan, you’re bringing two different incomes, credit scores and debt-to-income ratios to the table. That could give lenders more reassurance that you can repay the loan. In some cases, it could also help you qualify for a larger loan amount.
• You’re equally responsible for the debt. This can help reduce the financial burden because you aren’t carrying the monthly payments by yourself. If all goes well, you’ll repay the debt together with no problem.
• Your credit score could increase. Payment history accounts for 35% of your FICO Score, so making your monthly payments on time every month can help improve your credit—regardless of which co-borrower is making the payments.

Cons

• Part of your financial life is commingled with someone else. If your co-borrower is unable to contribute to the payments, the responsibility will fall on you. That could create financial stress if you have a high monthly payment.
• Your credit score could take a hit. Remember that a joint loan will appear on the credit reports of all co-borrowers. Any late or missed payments can impact your credit health in a negative way.
• You’re increasing your debt load. Adding a joint loan to your credit reports will increase your overall debt. That’s important because your outstanding balances contribute to 30% of your FICO Score. That could impact your ability to qualify for new credit going forward.

How to Get a Joint Loan

The process of getting a joint loan isn’t all that different from taking out a loan on your own. Here’s what you can expect:

1. Decide on the type of loan you need. Are you seeking a mortgage, auto loan or personal loan? The process of applying with a co-borrower may vary from one lender to the next.
2. Look for a lender that allows co-borrowers. Not all lenders allow multiple borrowers, so it’s wise to shop around and compare co-borrowing policies, rates, terms and monthly payments. Getting preapproved or prequalified with your co-borrower first can give you an idea of how much you can expect to borrow—and at what interest rate.
3. Apply for the loan. The application process can vary depending on the lender and loan type, but in general, you can expect a hard credit inquiry for both borrowers. The lender will likely look at both of your debt-to-income ratios and income. This is to ensure that you’re capable of making your monthly payments. If approved, the account will appear on the credit reports of each co-borrower.
4. Receive funding. If approved for a personal loan, you’ll receive a lump sum of cash you can use as you wish. Mortgages and auto loans are different. You’ll receive the asset (in this case, a car or a home) and then be responsible for repaying the loan amount, with interest, over a predetermined time period.

Frequently Asked Questions

• How Does a Joint Loan Affect Your Credit Score?

  For better or worse, a joint loan will affect each co-borrower’s credit score. That can be a good thing if you routinely make on-time payments. On the flip side, a history of late or missed payments can hurt both of your credit scores.

• Are Joint Loans a Good Idea?

  A joint loan can be a good option for married couples who want to make a big purchase together. Spouses aren’t the only ones who can be co-borrowers: A parent, other family member or friend can also apply for a loan with you.

• Are You More Likely to Be Approved With a Joint Loan?

  Having a creditworthy co-borrower might improve your chances of getting approved—and increase your borrowing power. That’s because another person is technically responsible for repaying the debt. But every lender is different, and your unique financial situation will ultimately determine your eligibility.

The Bottom Line

A joint loan is a type of loan you take out together with another borrower. This type of loan might make sense if you want to increase your chances of getting approved or finance something with your partner. It may be an option if you’re taking out a mortgage, car loan or personal loan.

Whether you’re applying with a co-borrower or on your own, your credit score is a key factor when seeking a new loan. The stronger your credit, the more likely you’ll be to qualify for the best rates and terms. You can get your FICO Score and credit report for free from Experian to see where you stand.