What is a joint loan?

Defining a joint loan

The term "joint loan" describes one loan taken on by multiple borrowers. One borrower is just as legally responsible for repayment as the other, regardless of who actually makes the payments.

This also means joint borrowers have equal access to the loan funds or the asset the joint loan was taken out to finance. For example, if a couple takes out a joint loan to purchase a car, they share equal ownership of that car.

According to Danny Cieniewicz, a financial advisor with Hyperion Financial, joint loans are very common for car loans and mortgages in which two people are married or cohabitating. That said, people don't have to be married or in a romantic relationship to borrow money together.

Co-borrower vs. co-signer

Joint loans are not the same as getting a loan with the help of a co-signer.

• Co-borrowers each have access to the loan funds or assets, with the same legal obligation for repayment.
• Co-signers do not hold any ownership of the funds or assets but still agree to be legally responsible for repayment if the primary borrower can't or won't pay.

Ultimately, co-signers usually enter the picture when the primary borrower doesn't have the credit score or income to qualify for funding on their own.

» MORE: Co-signing a loan: pros and cons

Joint loan eligibility requirements

Eligibility for joint loans depends on the type of loan you are applying for. There are unique eligibility requirements for various types of home loans, as well as auto loans, personal loans and other types of funding.

Cieniewicz explained that joint loans offer the advantage of letting one borrower benefit from the better financial position of the other. For example, a borrower with a less-than-perfect credit score may be able to qualify for a higher credit limit, a lower annual percentage rate (APR) or both if the other borrower on a joint loan has great credit and a high income.

» MORE: Requirements for personal loans

When to get a joint loan

There are numerous situations where joint loans make sense, although plenty of personal factors come into play. For example, it doesn't make sense to take on a joint loan with someone who's not on the same page with you about money unless you absolutely have to do so.

Joint loans are typical among married couples and domestic partners who share finances — no matter where they each stand with their finances. After all, these relationships are where the loan funds or assets purchased are more likely to be shared by both borrowers.

Cieniewicz said that joint loans are also common for student borrowers who need private student loans, since they may not have any credit history. Often, a parent or trusted relative is listed as a co-borrower or potentially a co-signer.

Joint loans can also make sense when someone with poor credit needs more favorable terms. However, Cieniewicz recommends that there be direct communication between the borrowers to make sure a plan is in place to repay the loan in this type of situation.

"In the event of a default or if one party does not repay, that could cause issues for both credit scores and could cause resentment between the two borrowers," he said.

Pros and cons of joint loans

If you're considering taking out a loan with another person as a co-borrower, you should first know the potential advantages and disadvantages.

What to consider before applying for a joint loan

Before you take on a debt with another person, Cieniewicz recommends speaking with the other borrower to make sure you both have a clear understanding of who will be responsible for paying the loan. For example, who will make each monthly payment, and when?

"If you're a co-borrower, you're both named on the loan, both have access to the loan dollars and are both equally responsible for its repayment," he said.

Also, consider whether you might be better off with a different borrowing situation altogether. If you're in a new romantic relationship, you may want to borrow on your own and avoid joint loans until you're sure your relationship will stand the test of time. If a friend asks you to be a co-borrower, think long and hard about what you're risking and if you're willing to lose the relationship if something goes wrong.

For the most part, both parties should benefit from a joint loan, or the loan won’t be a good idea from the start.

» MORE: Best ways to borrow money

Alternatives to joint loans

If you're on the fence about a joint loan, consider the additional financing terms at your disposal.

Individual loans

If you and the co-borrower are planning a specific purchase that requires a loan, you could get two individual loans (one in each name) to get the funding you need. While this wouldn't work for a home purchase or a car in most cases, you could take out two individual personal loans to finance new furniture or kitchen appliances for use in a shared home.

Loan with a co-signer

There are also situations where co-signing on a loan — or asking someone else to co-sign — makes sense. In this instance, the co-signer is legally responsible for repayment and may need to take that over completely if the primary borrower decides not to pay or can't pay.

Bottom line

Joint loans can make sense in some situations, and they're especially common among couples sharing finances and a home. That said, loans with more than one borrower can get complicated. Think long and hard before taking out a joint loan with a new partner or someone you haven’t known very long.

"A co-signed or co-borrowed loan will show up on your credit report as if it's yours, meaning you must make sure this decision isn't taken lightly," said Cieniewicz.