When your credit score is not up to snuff, chances are you are refused a loan. It is a must to have a credit score fair to middling to qualify for a loan at competitive interest rates. It cannot be possible to wait until the improvement of your credit rating, so a joint loan comes in handy. A joint loan works the same way as an individual loan, where you pay off a debt over a period of months along with interest, with the only difference being that both you and your co-applicant will be responsible for paying off the debt.
To sign off on your application for a joint loan, a lender will peruse the credit reports of both borrowing parties. Joint loans are usually applied when one of you has a poor credit rating, and therefore, the other borrowing party must have a good credit rating.
In addition to credit rating, the lender will evaluate the repaying capacity of both parties. You, both parties, are liable to pay off the debt. If one of you fails or refuses to pay, the other borrower will be legally bound to clear the whole of the debt.
Joint loans seem to be a great way to fund your needs when you cannot qualify for an individual loan, but they are subject to some risks.
Joint loans will affect the credit rating of both borrowers
Joint loans are the responsibility of both borrowing parties. If your partner fails to repay the debt, you will have to clear the whole dues. This will not only affect your budget but your credit rating as well. Your credit points will plummet, and you will find it more difficult to borrow money down the line.
While using a joint loan, ensure that you both will stick to the payments. Try to have a strong income source so you can avail of lower interest rates despite a bad credit score.
You could end up with a worse deal
Being linked financially to your partner with a bad credit score is just one drawback of these loans. Even though one of you has a good credit rating and good income sources, you will end up being offered outrageously higher interest rates.
Bear in mind lenders, including banks, are more concerned about their profits than your financial situation. A poor credit score will certainly have a bad impact on your borrowing capacity and the loan deal.
You will be accountable for the full debt payment
Although a joint loan involves payment responsibility towards partial debt, you will be bound to settle the whole of the debt if your partner does not pay at all. You cannot flinch from your obligation because of the clause in your contract. This will take a toll on your financial condition.
Interest rates of a bad credit joint loan are usually very high. It is likely that you struggle to repay the debt from your own earnings as the borrowing amount was determined based on the combined income, which must be higher than individual income.
You will be liable despite a break-off
Even though you have parted ways, you are still responsible towards the debt. If one of you dies or becomes bankrupt and their estate does not have enough money to cover the debt payment, you will be liable to clear the dues. Do not forget that this will affect your financial condition and credit score into the bargain.
Parting ways does not financially untangle you. Pay off your joint loan as soon as possible, and then make sure that you are not financially connected to your co-applicant in any way. If you have joint accounts like a joint bank account or joint credit card, take the necessary steps to avoid having an impact on your credit score and finances due to the financial irresponsibility of your co-applicant.
Loans you can seek through a joint application
Here are the loans that you can seek through a joint application:
- Secured loans
Secured loans can be applied through a joint application. These loans are backed by collateral. Since this lowers the risk of a lender, you are highly likely to get a loan at lower interest rates. Your house usually serves as collateral, so in case of a default by both parties, the lender will repossess the house to liquidate it to cover the outstanding balance.
- Unsecured loans
You can also take out a joint personal loan. However, the borrowing sum will not be too large as they are not backed by security. The risk on the part of a lender is too high, so chances of getting a lower interest rate deal are very bleak.
Small emergency loans like bad credit loans with no broker, payday loans, doorstep loans and text loans are also types of personal loans, but they cannot be applied jointly as the borrowing sum is not great.
- Mortgages
You can apply for a joint mortgage that allows you to borrow more from a bank or an independent mortgage lender. Despite a lower deposit size, you will be able to borrow sufficient money to get onto the property ladder.
The bottom line
When you have a bad credit score and are refused a loan, you think of joint loans as your last resort. These loans can allow you to borrow a larger sum, but they have consequences. In case your partner fails to clear the debt, your lender will ask you to pay off the debt, as you are responsible for clearing partial or full debt. Your credit score will go down in case your co-applicant refuses to pay off the debt for whatever reasons. Unfortunately, it will put a lot of burden on your finances. You will find it even harder to qualify for a loan at the best rates down the track.
Jessica William
Jessica William operates as a Senior Consultant and Chief Content Editor for 10 years at 1Onefinance. She assists the firm in getting a grip on the new lending laws and regulations. She does so by researching the trends, consumer requirements, and new audience preferences. Jessica is responsible for making important financial and administrative decisions.
Apart from helping consumers with the best solutions, Jessica Williams helps them ensure financial stability. She analyse the business data, finances, expenses, and revenue/ income of customers and determines necessary changes. Jessica finished her Doctorate in finance and law and implements her knowledge to the best interest of the firm and customers.
