What is joint borrowing?
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Joint borrowing is the process of taking out a loan or other type of financing with another person, often called a co-borrower. Although joint borrowing offers its share of advantages, like potentially qualifying for a wider net of financing options and receiving competitive interest rate offers, it has considerable risks.
The largest risk joint borrowers assume is being contractually responsible for repaying the entire outstanding loan or debt. If you are interested in this option, you should know how joint borrowing works and whether it’s an option that’s worth exploring in your situation.
What joint borrowing is
If you don’t meet the application requirements for a loan or want to qualify for a better interest rate, you can co-borrow the funds with another person in a process called joint borrowing.
If your application is approved, the joint personal loan or credit card is issued in both of your names and you are both legally liable for repaying the debt. Joint borrowing can also have an impact – negatively and positively – on both your credit reports and scores based on your repayment history.
How joint borrowing works
To take out a loan with someone else, start by finding a lender that allows joint borrowing. While joint personal loans are common in the mortgage and auto lending industries, finding lenders that allow joint applications for personal loans and credit cards can be more challenging.
Once you find a lender, you can submit a joint application for credit. The lender or credit card issuer will likely ask you to provide some general information for both yourself and your co-borrower, such as:
- Personal identifying information (names, Social Security numbers, dates of birth, etc.)
- Employment history (per person)
- Annual or monthly income (per person)
From there, the lender will likely check your credit reports and credit score in a process called a hard credit check. After conducting a hard check, your score will drop a few points but with a positive repayment history, it’s fairly easy to bring the score back up.
Depending on the loan, the lender may also review your debt-to-income ratios (DTI), which is the amount of discretionary income left over after dividing your monthly debts by your annual, gross income. Ideally, most lenders prefer a DTI under 36 percent for approval, so check to make sure your co-borrower meets the lender’s DTI requirement if yours is on the higher side.
Why choose a joint loan?
In some cases, applying for a loan with someone else may help you qualify for financing when you wouldn’t be eligible on your own. For example, joint personal loans are fairly common among couples when one person has lower credit or when two incomes can help the couple qualify for a larger loan amount.
Applying for a joint loan with someone who has an excellent credit rating might also help you secure lower interest rates or better terms. This is one reason why parents may apply for joint personal loans with their children, as joint borrowing may be an effective way to help your child build credit for the first time.
However, co-borrowing does come with risks, so you may want to consider other options first. For example, adding your child as an authorized user to your credit card might be an alternative to help them start establishing credit. When you can qualify for a loan without your spouse’s income or credit history, it’s usually better to remain independent to avoid potential financial harm down the road should you separate or divorce.
How does a joint loan affect my credit score?
When you co-borrow with another person, the account may show up on your three credit reports and your co-borrower’s credit reports, depending on the lender’s credit reporting policy. Any loan that requires a hard check has the potential to decrease your score, so you’ll want to avoid multiple hard checks in quick succession.
Lenders may interpret multiple checks within a short period of time as a credit risk, which can make it harder to get approved for a loan. What’s more, a hard check can stay on your report for two years, regardless of your repayment history.
Late payments on a joint account can also damage your credit scores. Seeing as most of your credit score (35 percent of your FICO score) is made up of your repayment history, it’s important to manage your monthly payments well.
Can you use your spouse’s income to get a personal loan?
If you want to use your spouse’s income to get a personal loan you can, but they have to be listed as a joint applicant. Without listing your spouse as a co-applicant, only your personal income can be considered for a personal loan.
Pros and cons of joint borrowing
Any loan should be taken out with some level of consideration, but it’s even more important to consider the benefits and drawbacks before taking out a joint loan.
Advantages of joint borrowing
- Better chance of qualifying (or securing a better deal). If you have bad credit or debt-to-income ratio challenges, the right co-borrower could make a huge difference.
- Qualify for a larger loan amount. Even with good credit, your borrowing capacity is limited based on your income and existing credit obligations. Adding a joint applicant to your loan application who earns a separate income from you might make you eligible to borrow more money.
- Build or rebuild your credit. A well-managed joint account could potentially help you improve your credit history and scores over time.
Disadvantages of joint borrowing
- Potential to be liable for the full debt. With a joint loan, you accept full responsibility for the debt. If your co-borrower can’t or won’t pay, the lender will still expect you to do so. For this reason, joint debts can be especially difficult to navigate in the event of a separation or divorce.
- Credit risk. If you fall behind on your payments, a joint account might drive your credit scores downward.
- May be hard to qualify for new financing. A new joint loan increases the amount of debt you owe, raising your debt-to-income ratio. Even if the new account has a positive effect on your credit score, it could reduce your borrowing capacity for future loans.
How to tell if joint borrowing is a good idea for you
It’s generally best to avoid co-borrowing (and co-signing, for that matter) whenever possible. If you’re considering a joint loan, ask yourself the following questions first:
- Can you or your potential co-borrower qualify for the loan without adding the other person as a joint borrower? If so, there may be little upside to opening the account together.
- Is a co-borrower required to share ownership of an asset (like a home or car)? A joint loan might not be your only option. You can talk to an attorney about making sure both names appear on the property title even if only one person takes out the loan.
Of course, sometimes joint borrowing may be necessary to qualify for the amount of money you’re seeking. Depending on your situation, you might not qualify for the payments on a large home improvement loan or mortgage with your income alone. If you do decide to co-borrow with someone else, just be sure that you each understand the risks before you sign on the dotted line.
Personal loan lenders that offer joint borrowing
If you’re considering a joint personal loan, there are a few online lenders that accept this financing option. Here are some lenders to look into:
- LendingClub: When checking your rate, select the “Two of Us” option to indicate that you intend on exploring offers for a joint loan. You’ll need to provide information about you and your co-borrower to get started.
- SoFi: Another financing option is through SoFi, which offers a joint-borrower personal loan. Loan applications with a co-applicant can take an extra one to two weeks to process.
- Prosper: This lender requires individual borrowers to have a minimum credit score of 600 to qualify for a personal loan. However, if you don’t meet this qualification, you can apply with a co-borrower.
Before you co-borrow, it’s important to do your homework, just like you would with any other type of loan. You can start by checking your three credit reports for errors. Ideally, both you and your co-borrower should complete this step.
Next, take the time to shop for loans with multiple lenders. Compare interest rates, fees, repayment terms and anything else that might affect the cost of your joint loan or the size of your monthly payments. Once you and your co-borrower have all of the information, you’ll be able to choose the best loan for your situation.