Seven things to consider when taking a joint personal loan

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Date: 12 May 2022

People apply for a loan for a number of reasons - to finance their small business, renovate their homes, and even to consolidate debt. A personal loan can be the best loan to take out when looking to cover a range of unspecified personal expenses. But did you know that you can share the ownership and responsibility for the loan with someone else?

If you have a trusted partner you can repay the borrowed funds with, then a joint personal loan could be the loan for you. Like the typical personal loan which you take out on your own, a joint personal loan can cover a myriad of expenses. That said, you should always consider the risks associated with sharing a loan with somebody. These risks can include the following.

Credit score

Your credit score can make or break your loan application. You might think that bad credit rating immediately equates to rejected loan applications. While a lousy credit score does minimise your chances, your partner's credit score could be the saving grace in a joint personal loan.

So, there's no need to lose heart as there are loans for horrible credit scores. A joint personal loan can give people more funding options, despite their personal credit standing. If you have a co-borrower with a good (if not better) credit score to share a loan with, you can increase your chances of loan application approval and of acquiring the funds you need.

Debt-to-income ratio

Before applying for a joint personal loan, examine the gross monthly income and outgoings of your partner first. You need to be sure there is sufficient disposable income to go towards repaying the debt. You don't want to borrow money with someone already in a tight financial situation.

Even with good credit, your loan application is likely to be rejected if your partner has a high debt-to-income ratio. To lenders, this means a poor balance of debt and income and equates to a lesser ability to repay new and current liabilities.

Duration of the loan

A personal loan can last from 12 to 60 months. Usually, a longer duration would equate to lower monthly payments and higher interest rates. When considering a joint personal loan, choose the term length appropriate to you and your partner's financial situation.

Ask the right questions! Do you want more flexible repayment terms, or do you want to be debt-free sooner? Can you repay a greater amount of money over a shorter period of time with lower interest rates or a lower amount for an extended period but with high interest?

Can your co-borrower pay on time?

A joint personal loan is a shared responsibility. It's crucial you evaluate whether your partner is reliable enough to pay what is owed and on time. You don't want a co-borrower who will potentially leave you hanging - and with more debt!

Aside from credit score and debt history, look at the bigger picture. To avoid the risk of financial abuse, evaluate your partner's attitude towards financial matters, how they value money, and how they communicate with you to fulfil shared financial duties.

The trap of bigger debts

According to a study on consumer debt back in 2021, the average debt of US borrowers with a personal loan was $17,064. While you might think that applying for a joint account is better as it divides repayments, that isn't always the case.

A joint personal loan means more extensive obligations. If your partner can't or won't pay their part, the burden is all yours. Additionally, most joint accounts allow one person to borrow money without informing the other. Borrowing could trap you into bigger debts and set you up for financial distress.

How much money you need and what for

With all technicalities considered, the simplest but most vital question is determining the amount of money you need and what you will use it for. It's easy to fall into debt by taking out loans for unnecessary and unplanned expenditures.

Having a partner to share loan ownership with will help you be more accountable and mindful of where your borrowed funds go. You can divide the finances and burden of repayment between two people, making it easier for you to qualify for the loan but also to manage financial duties.

Possible impact on your relationship

An often overlooked aspect of entering a joint loan, perhaps with a sibling or spouse, is its possible impact on the relationship, especially the negatives.

Missed repayments could lead to debt, debt could lead to conflict, and conflict could lead to a strained relationship. Because it's a shared financial responsibility, a blunder by one party could impact the other. A joint personal loan could end up driving a wedge into the relationship. For example, if monetary problems arise because one party defaults on their payment, borrows money without informing the other party or simply mismanages money.

Final thoughts

Loans come with great responsibility but responsibility you could share with a trusted and financially reliable partner. There are considerable risks - as well as benefits - under a joint personal loan, including bigger debts and negligent co-borrowers. So you need to consider the issues discussed above. If the balance of risk and benefits is favourable, you could apply and qualify for a loan and acquire the funds you need.

Copyright 2022. Featured post made possible by Sally Trase of Start Grid/Searchtides for CreditNinja.

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