Money

Taking out a joint loan: everything you need to know

August 29, 2018

Making financial decisions together can be tricky. You will need to be open and honest about your finances, especially your credit history. Taking out a joint loan with your partner or with a family member might seem like a wise financial decision, but you will need to be completely certain that the other party is willing and able to pay their share.

If you want to to apply for a loan with a partner, family member or business partner, there are some things that you should know beforehand. Below is a list of everything you need to know when you are taking out a joint loan.

Joint liability explained

By taking out a joint loan, you might think that you are only liable for your “half” of the loan. However, the reality is that you are liable to repay the whole amount should the other party be unable or unwilling to pay.

It does not matter who has spent the money or who now owns the items, you are both liable to repay the full amount. This is true whether you break up, end your marriage or your partner passes away. A joint loan is a responsibility that needs to be taken seriously by both parties.

What types of loans can be taken out jointly?

There are several different types of loans that can be taken out jointly, namely:

  • Secured loans: These are loans such as a bond or a mortgage.

 

  • Bank accounts: You can take out a joint bank account that has an overdraft facility if this is needed.
  • Unsecured loans: An unsecured loan includes a personal loan from a bank or a business loan.

 

Both of you need to fit the loan criteria

This is an important aspect to consider when applying for a joint loan. Both of you will need to match the loan criteria, not only the main contributor. This means that you will both need to undergo a credit check, both of you will have to provide your banking details and both of you will need to be employed.

If one of you does not meet the criteria, then it might be difficult to apply for a loan, especially if it is for business finance. Discuss your financial situations before you send in any applications and try to find ways to remedy any problems you might have. Bad credit or no credit history can be highly detrimental to any loan application, joint or otherwise.

What if one of you has bad credit?

Having bad credit can be detrimental to loan approval, and if one of you has bad credit this could affect your application. When taking out a joint loan, you are “co-scored”, which means that you will be scored based on both credit scores combined.

If one of you has a much lower credit rating, this could be problematic. Before you apply for a loan, you should be sure to check your separate credit histories and question any discrepancies you find. You should both aim to improve your credit rating before you send in a joint loan application, as this can help to improve the approval process.

Relationship matters

A joint loan taken out with a romantic partner might sound like a great idea, but it can become tricky further down the road. This is especially true if you have used the loan for an “emotional purchase”, such as buying a home together.

If you are not married to your partner, before taking out a joint loan, you will need to get an agreement in writing that they will continue to contribute even if the relationship should end. For business partners, you will need to have a strict, legal contract stating that you are both liable to repay the loan even if the partnership should dissolve. Take your relationship seriously when applying for a joint loan, as it can affect your loan debt.

Responsibility and ownership

This is one of the most important aspects of taking out a joint loan. You will have to make some decisions regarding who is responsible for what and who will own the purchase once the loan has been paid off.

You will need to consider who will be responsible for making payments, who owns the property or vehicle (if this is the purpose of the loan), how you will be able to get out of the loan and what should happen if one of you passes away. This is very important to discuss because the way in which you own property is treated differently if you have a joint loan. If one of you passes away, the descendents of your partner could become the co-owners of your property, rather than you becoming the sole owner.

 

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