Drawbacks of a Joint Loan

There are two kinds of joint loans: one in which the original borrower does not have sufficient income or credit rating to apply and thereby needs a co-signer, or there are two borrowers (spouse and/or friend) who wish to buy a home via a mortgage. The drawbacks of these joint loans become immediately apparent.

Co-Signed Loan

Let’s assume you want to buy a car or wish to consolidate your debt and pay it off through a loan. And let’s also assume your credit and/or income is not good enough to apply. You ask a family member or friend to co-sign the loan. What happens if you default on the loan? Or what if you have a falling out with the co-signer? Do you see the predicament you would be in?

Mortgage Loan

Here is an even worse case scenario. Let’s assume you and a friend and/or spouse decide to purchase a home. You apply for a joint mortgage. One of you has a lower credit score than the other, but one of you may also make more money than the other. The bank doesn’t base the interest rate on the higher income earner but rather the one who has the lowest credit score. That’s one drawback. The other drawback is this: What if you and your spouse separate or divorce? What if you and your friend have a fight and cannot come to terms to repair the friendship? Both of these instances may occur, and if they do, how will you repay the mortgage? The result is you may have to consult with a lawyer to determine the best course of action.

Weigh the Pros and Cons before Venturing into a Joint Loan

The banking industry today is not like it was years ago, handing out loans “willy nilly.” They have become quite conservative in lending money since the sub-prime mortgage crisis. Moreover, in today’s economy, the jobless rate is very high. Consider what would happen if your partner were to lose his or her job. Could you afford to carry the weight of the mortgage payments every month? So too, asking someone to co-sign a loan is also risky not only for them, but for you as well. It would be a very prudent course of action to weigh the pros and cons before deciding to apply for a joint loan.