Applying for a loan with your partner can increase your chances of getting the nod, especially when your credit score is not up to snuff, but there are associated risks that should raise the alarm.
A joint loan is a term used to address a sum of money you borrow along with somebody else where you and your partner are both obliged to pay off the debt. Like any other loan, they work the same way, where you assume to pay interest on top of what you borrow. Instalments are paid back over an extended period of time. All people signing the loan agreement will be bearing the payment partly as well as outright, meaning if one of you fails or denies liability for their part of the payments, the other borrower will have to make up the shortfall.
Joint loans are also aimed at subprime borrowers, and therefore, they are known as bad credit joint loans. They can be secured and unsecured. After you put in the application, your lender will peruse your credit file to calculate the level of risks in lending you money. You, both applicants, will see a temporary crash in your credit score that will bounce back after making a few payments on time.
What will be the impact of bad credit on the other applicant?
A poor credit rating calls your credibility into question, and therefore, your lender will either turn you down or charge higher interest rates. You will also get less money than someone with a good credit score. Here comes a joint loan.
You can think of applying for a loan with your spouse or another family member with a good credit rating. This will strengthen the chances of getting approval. However, it is crucial to note that you will see a negative impact on your credit rating as your credit history is linked to someone with an abysmal one.
Later on, when you apply for a loan individually, you will have fewer chances of getting the nod. Most of the lenders will doubt your repaying capacity and charge outrageously higher interest rates. The size of the loan will also be restricted to mitigate the risk.
Another drawback is that if your partner fails or refuses to repay the debt, you will have to cover the shortfall yourself, which will result in lower credit points. Both parties will bear the damaging consequences.
What happens when you break off?
A break-up cannot free you from the responsibility of paying off a joint debt. Never ever try to abdicate your responsibility for debt payments, as this will not only affect your credit rating but also take a toll on your partner’s credit score. Understand the fact that you are not a guarantor but a co-borrower. You are equally responsible for clearing your dues.
If one of you dies, their estate will be used to cover payments, and if that is not sufficient, the debt will have to be paid by the surviving party. If your marriage is falling apart, clearing your financially linked accounts and joint bank accounts is always suggested.
Once you have untangled your accounts from your partner, you should check with each credit bureau if there are any accounts to be dealt with. Financial disassociation is a must to stop having a negative impact on your credit score and borrowing power due to the negligence of your partner. If you still find any links, make sure you ask credit reference agencies to sort the issue.
Joint loans may not be a good idea when you have a very bad credit rating
Though joint loans are an available option when your credit score is poor, you might prefer considering them in case of a very poor credit loan. It can be difficult to have a lender sign off on your application then. Just because your partner has a good credit score does not mean that your lender will not take into account your financial situation to make a decision.
A lender seldom gives the green light to your application with a very poor credit report. If a lender approves, interest rates will be very high. It can be challenging to repay the debt when you get an extortionate deal. While there are some lenders to entertain your application, it is always suggested that you carefully examine your repaying capacity.
No lender can be held responsible for offering you an expensive deal because the rule of caveat emptor applies to you. If you are not convinced that you will be able to repay the debt on time, you should drop the idea of applying for a joint loan.
If you need money to fund unforeseen expenses, you can simply take out very bad credit loans with no broker and no guarantor. As these loans are small, you can easily get approval for them. You do not need a co-applicant and a guarantor with a good credit rating. These loans will be expensive, too.
What is an alternative to a joint loan?
Well, if you have been refused a joint loan, you should try to improve your credit score first. Take effective measures such as:
- Paying all bills on time
- Do not borrow more
- Keep your credit utilization ratio up to 25% to do up your credit rating.
If it is too urgent, you can arrange a guarantor with a good credit score, but again, the odds are you will be turned down. Chances for getting the nod for any loan are very bleak when your joint application has been cast aside. Once you ameliorate your credit score, you will be able to borrow money without the help of a third party.
The final comment
A joint loan can be risky because they are subject to high-interest rates. They can take a toll on both applicants’ credit scores if either of you fails to make the payment. It is recommended that you improve your credit score before borrowing money.
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.