Joint and Shared Loans Allow Multiple Borrowers
Why you might want a joint loan for auto, home, and more
A joint loan or shared loan is credit made to two or more borrowers. All borrowers are equally responsible for repaying the loan, and every borrower typically has an ownership interest in the property that the loan proceeds go toward. Applying jointly can improve the chances of getting approved for a loan, but you'll need to make some careful decisions before you sign everything.
Why Choose a Joint Loan?
There are many reasons that applying for a joint or shared loan may work better for borrowers, including pooling your incomes, benefitting from one borrower's credit score, and extra assets.
Increasing the income available to repay a loan is a primary reason for applying for a loan jointly. Lenders evaluate how much borrowers earn each month compared to the required monthly payments on a loan to calculate your debt to income ratio.
Ideally, any debt payments you have only use up a small portion of your monthly income. If the payments are too large compared to your monthly income, adding another income-earning borrower can lower your ratio and help you get approved.
Lenders prefer to lend to borrowers with a long history of borrowing and repaying on time. If you have an average or low credit score, adding an additional borrower with a high credit score can help your application and make you more likely to be approved.
In a joint application for a mortgage, lenders will usually use the lower of your two credit scores.
A second borrower can also bring assets to the table, such as providing additional cash for a substantial down payment. That’s particularly helpful when lenders discourage “gifts” from non-borrowers, as with some mortgage loans. An extra borrower might also pledge collateral that they own to help secure a loan.
In some cases, it makes the most sense for borrowers to apply jointly. A married couple, for example, might have all their assets combined and want to apply for a joint home or auto loan.
Married people can still get a mortgage in one person's name only, though that person's income and credit must be sufficient to qualify. However, if you live in a state with "community property" laws, the home will belong to both spouses, even if the mortgage and title are in only one partner's name.
Joint Loan vs. Cosigning
With both joint loans and cosigned loans, another person helps you qualify for the loan. They are responsible for repayment (along with the primary borrower), and banks are more willing to lend if there’s an additional borrower or signer on the hook for the loan.
However, joint loans are different from cosigned loans.
A cosigner has responsibilities but generally does not have rights to the property you buy with loan proceeds. With a joint loan, every borrower is usually (but not always) a partial owner of whatever you buy with the loan. Cosigners simply take all of the risks without any benefits of ownership.
Cosigners do not have the right to use the property, benefit from it, or make decisions regarding the property.
Joint Loan vs. Cosigning
Joint loan Borrowers take out the loan together and jointly own the property the loan pays for.
Cosigning One borrower takes out the loan and owns the property it pays for. The cosigner has no right to the property but guarantees they will pay the loan if the primary borrower defaults.
Both Cosigners and joint borrowers are 100% responsible for the loan, including the consequences for defaulting on payments.
Relationship Matters for Joint Loans
The relationship between borrowers may be relevant for a joint loan. Lenders are not supposed to treat married and unmarried applicants differently if they submit a joint application. In practice, however, some lenders may prefer for unrelated borrowers to apply individually, which makes it harder to qualify for large loans.
If you’re not married to your co-borrower, put agreements in writing before jointly buying property or taking on debt. In a divorce, court proceedings usually divide assets and responsibilities. But informal separations can be more difficult if you don’t have explicit agreements in place.
Responsibility and Ownership for Joint Loans
Before deciding to use a joint loan, examine what your rights and responsibilities are. Get answers to the following questions:
- Who is responsible for making payments?
- Who owns the property?
- How can I get out of the loan?
- What if I want to sell my share?
- What happens to the property if one of us dies?
Co-ownership is treated differently depending on the state you live in and how you own the property. If you buy a house with a romantic partner, both of you may want the other to get the home at your death, but local laws may say that the property goes to the deceased's next of kin. Without valid documents to say otherwise, the family of the deceased may become your co-owner.
Getting out of a loan can also be difficult (if your relationship ends, for example). You can’t just remove yourself from the loan, even if your co-borrower wants to remove your name. The lender approved the loan based on a joint application, and you’re still 100% responsible for repaying the debt.
In most cases, you will need to refinance a loan or pay it off entirely to put it behind you. Even a divorce agreement that says one person is responsible for repayment will not cause a loan to be split (or get anybody’s name removed).
Is a Joint Loan Necessary?
You may not need to apply jointly if one borrower can qualify individually. Both of you (or all of you, if there are more than two) can pitch in on payments even if only one person officially gets the loan. You still might be able to put everybody’s name on a deed of ownership, even if only one of the owners applies for a loan.
Some lenders object to non-borrowers contributing to the down payment. But a bigger down payment can save money in several ways:
- You borrow less, and you pay less in interest on a smaller loan balance.
- You have a better loan-to-value ratio and can qualify for a better interest rate.
- You might be able to avoid paying private mortgage insurance (PMI).
If you want to take advantage of the benefits of a bigger down payment, it might be worthwhile to add a joint borrower.
For substantial loans, it may be impossible for an individual to get approved without other borrowers. Home loans, for example, can require payments so large that one person’s income will not satisfy the lender’s desired debt-to-income ratios. If your own income is insufficient to qualify, a joint borrower may be necessary.
Consumer Financial Protection Bureau. "Making the Move to Homeownership on Your Own or With Someone Else." Accessed Mar. 27, 2020.
Consumer Financial Protection Bureau. "I Was Asked to Co-Sign Financing for a Car. What Am I Being Asked to Do and What Does This Mean for Me?" Accessed Mar. 27, 2020.
Consumer Financial Protection Bureau. "I Am Not Married but Want to Submit a Joint Application for a Mortgage or Home Equity Loan With Another Person. Can We Be Treated Differently From Married Joint Applicants?" Accessed Mar. 27, 2020.
Consumer Financial Protection Bureau. "How to Decide How Much to Spend on Your Down Payment." Accessed Mar. 27, 2020.