What to Know Before Applying for a Joint Loan

Spouses, partners, or even relatives may, at some point, consider applying for a loan together. As with anything, there are pros and cons to applying for a loan with someone. It's important to think about the advantages and the disadvantages before you make a final decision.

Applying together could help you qualify for a larger loan. Because you're applying jointly, the lender will consider both your incomes as means for repaying the loan. Two incomes means you're able to pay more each month and you can qualify for a bigger loan than you could if you were shopping alone. When you're buying a house, for example, it completely changes the types of homes you're looking at.

It's easier to qualify together if one person has a bad credit score. This helps especially if the borrower with the lower credit score has the higher income. Despite having enough money to repay the loan, a bad credit history can result in a denied loan application. But, applying for a loan with someone who has a good credit history improves the chances that you’ll get approved for the loan.

Applying together helps improve the other person’s bad credit score. Improving a bad credit score is tough because the consumer has to get new accounts with positive payments to start raising their credit score. However, getting new applications approved is tough when you have bad credit. Applying for a loan together (and making timely payments on the loan) will allow the person with the bad credit to improve their credit score.

Don't forget to consider the potential drawbacks.

Both people are reponsible for the loan payments. Regardless of who benefits from the loan, both people who sign are responsible for the payments. Even if only one person drives the car or lives in the house. If the payments become delinquent, the lender can go after either party for the loan payments. And if one person files bankruptcy, the other person becomes solely responsible for the remaining balance.

If the relationship ends, the loan is still there. If you have a loan with someone and you decide to part ways, the joint loan remains until the loan it's completely repaid. For example, in a divorce proceeding, the judge may give the house to the ex-wife, but if the ex-husband’s name is also on the mortgage, then the lender will still hold both parties responsible for the mortgage payments.

Things get stickier when un-married partners split up. It’s much harder to decide who gets what and who’s responsible for the debt because there are no court proceedings to end the relationship. There's no judges or attorneys deciding how to sort out assets and liabilities.

Both people on the loan are affected by any late payments. Late payments affect both borrowers’ credit histories. Any late payments made on the loan will be reported on both parties’ credit reports, no matter who the two of you have decided will make the payments. Both your credit scores can be damaged by late payments. That will make it hard for the two of you to qualify for future loans either individually or jointly.

Before applying for a loan with anyone, make sure you discuss payment details beforehand. You need to outline who's going to make the payment and come up with a plan for how you'll handle it if that person isn't able to make payments. Having a solid plan can prevent troubles down the road.