With a plethora of the types and kinds of loans on offer these days (yes, you heard it right, you can now borrow for christmas expenses too), one is bound to lose their way in the thicket of formal financing.
Secured or unsecured? Fixed-rate or variable? There are options aplenty that branch out into more choices. It’s only natural to feel lost.
An oft-heard dilemma that borrowers face, especially for large loans, is choosing between joint and solo loans.
While individual loans are much more popular and covered under existing literature, we’ll give you a rundown of joint loans today – the what and why, along with merits and demerits – so that you are well equipped with the right knowledge and make the appropriate decision.
What Is Joint Borrowing?
As the name suggests, joint borrowing is the act of taking credit with someone else – jointly. Such loans are usually opted by partnership firms, businesses and couples. Individuals who have a bad credit history often end up taking the joint loan route for obtaining credit.
Joint loans are taken out in the name of two or more applicants, and generally, the liability also falls on each borrower equally. However, there’s a caveat.
Things To Keep In Mind: Joint Loans Liabilities
When a couple takes out a joint loan, it might be thought that, ideally, the obligation to pay the loan back falls equally on both partners. The reason this condition is ‘ideal’ at best is because loan agreements don’t specify the source of the money to be paid back.
It doesn’t matter whehter one partner is paying more than 50% of the share or even the whole loan. When a joint loan is taken out, the agreement only states that the borrowers, as many as they are, are liable to pay the principal amount and the interest back in full.
So even if a partner(s) refuse to pay or are unavailable for payment, the liability of the remnant of the amount falls back on the other borrower(s).
One cannot wiggle their way out of paying back, citing the reason that a fellow borrower is not paying. This is called a joint or several liability.
As we explain later, several liability has both its advantages and disadvantages.
Pros Of Joint Borrowing
1. Ease of Obtaining Credit:
We earlier mentioned that those having a poor credit score take the joint loan road towards credit. The reason is that when joint loan applications are being considered for approval, the credit score of all applicants has a bearing on the final decision.
That way, in the case of one of the partners having a less than desirable credit score, the credit score of the partner(s) can cover that base. If both the partners have a higher than average credit score, then getting an approval is a cakewalk.
2. Debt Consolidation:
If one of the partners has taken up several debts and fails to pay back all of them, the other person can consider a joint loan debt consolidation plan. One large consolidated debt is better than several small ones to manage.
3. Larger Loan Amount:
When taking out a loan individually, we end up making a compromise on the amount borrowed, keeping in mind our limited capacity to pay it back.
With joint loans, on the other hand, the income of two individuals is considered, and the ability to pay back is enhanced. As a result, a larger loan amount can be accessible.
4. Cut Overdraft Costs:
Loan accounts are equipped with many ways to cut your overdraft to allow people to take more than their credit limit, at times, but at a very high rate of interest.
The costs of overdrafts can be ginormous, and individual account holders steer clear of it even during times of need.
A joint loan account, on the other hand, is a different story. The overdraft costs, which seem exorbitant for a single individual to shoulder, can be paid without much difficulty when divided amongst two or more people.
Cons Of Joint Borrowing
1. Several Liability:
The shared burden of a loan also comes with the condition that the loan has to be paid by someone no matter what. In the case that your partner fails to pay, the liability of the whole amount falls on a single person.
2. Overdraft – The Flipside:
Several liability also applies to overdrafts. Your partner might withdraw a lot of money and refuse to pay later. The responsibility to make the bank good – along with a hefty interest payment – would end up entirely on your wallet.
3. Credit Score Woes:
Your credit score will most likely suffer in the event of default in credit repayment. In cases where one of the borrowers has a poor credit score, the chances of defaults are high.
Worst of all, if they fail to repay the bank in time, it would reflect poorly on all the borrowers’ credit scores.
When Does One Take Out A Joint Loan?
With the advantages and disadvantages of joint borrowing listed above, one can clearly decide when to take a joint loan and when to go solo.
One of the primary reasons listed for taking out joint loans is to clear out the way for easy credit. In case one has a poor credit history, a partner’s stellar credit score can keep their head afloat.
Or, when the amount of the loan in question is very high, one can opt for a joint loan to share the burden of repayment. Debt consolidation with a partner is a prudent choice to make when your finances are in shambles.
However much the appeal of joint borrowing, people always advise against them. The several liability clause is a huge risk to take unless you’re absolutely sure.
There are firms that offer bad credit score loans, so one does not always have to rope in a partner to convince the bank. Until and unless there is absolutely no room for compromise on the amount of the loan, one can always opt for a solo loan.