A joint loan is a loan made to two or more borrowers. With more than one borrower, you have more income to pay the loan, and it may be easier to qualify for a large loan. In addition, additional borrowers may have better credit and more collateral to help you qualify.
Joint Loan vs. Co-Signing
With a joint loan and a co-signed loan, another person helps you qualify for the loan. They are responsible (as are you) for repayment, and banks feel more comfortable if there’s somebody else on the hook for the loan. This is the main similarity: both co-signers and co-borrowers are 100% responsible for the loan. However, joint loans are different from co-signed loans.
The relationship between borrowers may be important when applying for a joint loan. Some lenders only issue joint loans to people who are related to each other by blood or marriage. If you want to borrow with somebody else, be prepared to hunt a little more for an accommodating lender. Some lenders require unrelated borrowers to apply individually -- which makes it harder to qualify for large loans.
If you’re not married to your co-borrower, be sure to put agreements in writing before buying expensive property. In the unlikely event of divorce, court proceedings tend to do a thorough job of dividing assets and responsibilities; informal separations can last longer and be more difficult if you don’t have agreements in place.
Is a Joint Loan Necessary?
Remember that the main benefit of a joint loan is that it’s easier to qualify for loans when by combining income and credit scores. You may find that you don’t need to use a joint loan if one borrower can qualify individually. Both of you (or all of you, if there are more than two) can pitch in on payments. You might even be able to put everybody’s name on a deed of ownership -- even if one of the owners does not borrow as part of a joint loan.
Of course, it may be impossible for one person to qualify for a large loan. Home loans, for example, tend to be so large that one person’s income will not satisfy a lender’s desired debt to income ratios.
Responsibility and Ownership
Before deciding to use a joint loan (or not), make sure you understand what your rights and responsibilities are. Get answers to the following questions:
- Who is responsible for making payments?
- Who owns the property?
- How can I get out of the loan?
- What if I want to sell my share?
- What happens to the property if one of us dies?
Getting out of a loan can also be difficult (if your relationship ends, for example). You can’t just remove yourself from the loan -- even if your co-borrower wants to get your name removed. The lender made the loan based on a joint application, and you’re 100% responsible for repaying the loan. In most cases, you have to refinance a loan or pay it off to put it behind you.