What are joint loans and how do they work?
Joint loans can be taken out for several reasons, from mortgages to overdrafts and each person is fully liable for the debt being repaid.
Taking out a mortgage to buy a new property is one of the most common forms of joint loans, along with joint account overdrafts. Credit agreements like standard loans, credit cards, car finance, on the other hand, are usually all in one name, unless specialist products.
When you take out a joint loan, it’s important to understand that both of you are jointly liable to repay the debt. So if for some reason one person can’t pay it back, or chooses not to, the other will become responsible for repaying the whole amount.
Here we look at what you need to know about taking out a joint loan.
What is a joint loan?
A joint loan is a loan jointly applied for, used, and paid back, between a number of people. The arrangement will usually be for two people, who could be a couple, family members, business partners or friends, however in the case of mortgages as many as four people can team up.
When you take out a joint loan you’ll be told how long it will last, how much you need to pay back over time, and the interest rate.
By borrowing with somebody else, you might get a bigger loan at a lower interest rate. This is because lenders often see joint applications as less risky since they aren’t solely relying on one borrower to repay the debt.
The different types of loans and debt that can be shared
There are several different types of loans which can be taken out jointly, including:
- Secured loans, like mortgages
- Bank accounts (with overdrafts)
- Personal loans & car finance - although these are less common to find.
Who can share a joint loan?
Taking out a joint loan is not something to do without careful consideration. This is because both people taking out the loan are jointly responsible for paying it back.
Therefore, you need to think about the person you are borrowing with carefully before you sign on the dotted line. The following questions are a good starting point:
- How long have you known them?
- How reliable are they?
- How much do you know about their finances?
- If they lost their job or couldn't work, what would happen? Do they have savings or other assets they could fall back on?
- Do you trust them?
You may be able to take out a joint loan with the following people:
- Partner (you don’t need to be married or in a civil partnership)
- Family member (this could be a parent, sibling, or long-lost cousin)
- Business partner (you may consider taking out a specific business loan)
What is the eligibility criteria for a joint loan?
Whenever you take out new debt, your new lender will look at your credit history. This is to see how likely you are to pay back the debt. The better your credit history, the better chance you have of securing the loan. The largest loans, and those with the lowest interest rates, are reserved for people with the best credit scores, as they are considered least likely to miss repayments or default on the loan.
When making a joint loan application, both parties will need to fill in their details and the lender will look at both of their credit scores. This is because they are jointly liable for repaying it so a lender will want to assess whether each person is able to. Therefore, it’s important to have a frank and honest discussion with the person you’re thinking about taking out a joint loan with, before you apply.
How does a joint loan affect your credit rating?
If you take out a joint loan with another person, this means not only are you jointly responsible for the debt, but your credit files are also linked.
This can be a problem if one person has a poor credit history. This is because if you apply for credit again on your own, lenders will look at both your record and the other person’s, which may influence their decision.
The pros and cons of joint loans
- You may be able to get a bigger loan.
- It may be the only way to qualify for the mortgage you need.
- The interest rate could be lower than on a loan just for one person.
- You share the cost of repaying the loan.
- You are both jointly responsible for repaying the loan.
- If there is a falling out and one person stops repaying a loan, the other is still responsible for the debt.
- With personal loans, one person may spend the money on something that wasn’t agreed with the other person.
- If one person dies, the other still has to repay the full amount.
The best alternatives to joint loans
If you don’t want to take out a joint loan, the only alternative is taking one out on your own. The disadvantage here is that you may not be able to borrow as much and the interest rate could be higher.
However, if you are able to take out a loan, such as a mortgage, car finance deal, or personal loan on your own, and you’re comfortable repaying it, you may not need to get anyone else involved.
Can you get out of a joint loan?
It’s usually not possible to get out of a joint loan without repaying it and this is why you need to think carefully before taking one out. If, for example, you take out a joint loan with a partner and then split up, you’ll still need to work together to repay it, even though you are no longer in a relationship.
If a partner is refusing to pay, speak to your lender and explain the situation. You will have to make the full payments but there may be some alternatives offered by the lender, depending on the situation.
What happens to a joint loan when someone dies?
Usually, when someone dies, any debts they have outstanding are paid off from their estate, which is the amount of money and assets they own. However, if that outstanding debt is part of a joint loan they have not fully repaid, the other person who took out the loan will become responsible for paying off the rest of the loan in full.
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Rebecca Goodman is a freelance journalist who has spent the past 10 years working across personal finance publications. Regularly writing for The Guardian, The Sun, The Telegraph, and The Independent. Read more