What is joint borrowing?

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When you have credit or income challenges, joint borrowing might help you qualify for loans you can’t get on your own. Taking out a loan with someone else may also help you secure lower interest rates and better terms. Of course, joint borrowing comes with some downsides, too. If you’re considering adding a co-borrower to your credit application, it’s a good idea to understand the pros and cons upfront.

What is joint borrowing?

Joint borrowing is the process of taking out a loan or other type of financing with another person, often called a co-borrower. If your application is approved, the 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 on both of your credit reports and scores.

How joint borrowing works

To take out a loan with someone else, you’ll need to start by finding a lender that allows joint borrowing. While joint loans are common in the mortgage and auto lending industries, finding lenders that allow joint applications for personal loans and credit cards can be a bit more challenging.

Once you find a lender that allows co-borrowing, you’ll need to 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).
  • Etc.

From there, the lender may check both of your credit reports and credit scores. It may also review your incomes versus the debts you already owe (aka your debt-to-income ratios) to see if, together, you’re eligible for financing.

Why choose a joint loan?

Although everyone has their own individual motivations, there are several reasons why consumers may seek joint credit. 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 loans are fairly common among couples when one person has bad 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 loans with their children. Joint borrowing may also be a way to help your child build credit for the first time.

However, co-borrowing does come with a set of risks. If you can accomplish your goals without a joint loan, it’s something you should carefully consider. For example, adding your child as an authorized user to your credit card might be an alternative to help them start to establish credit. And when you can qualify for a loan without your spouse’s income or credit history, it’s usually better to remain credit independent. (The same goes for your spouse.)

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. Whether you’re a sole borrower, the primary borrower or the co-applicant, any loan that shows up on your credit reports has the potential to impact your credit score for good or ill.

Late payments on a joint account can damage your credit scores — perhaps severely. Yet a well-managed joint loan has the may to help you improve your credit over time. In the end, the way a joint loan impacts your credit scores primarily depends on whether it shows up on your credit reports and how you manage the account.

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.

Should I consider joint borrowing?

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.

Next steps

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.

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