Joint loans: Here's how it affects your credit score

By Harshala Chandorkar

Nothing is more troublesome than purchasing a house of your dreams or a car or when you have a big wedding coming up. It involves lots of hassles and money. For example a home loan is usually the biggest financial liability in an individual’s life, and thus needs to be carefully considered. Sometimes you may want to buy a house of greater value, but you may not be eligible for a huge amount of loan from the bank. This is where opting for a joint loan comes in handy.

Here are some pointers about what a joint loan is and how it can affect your credit report and score:

Why do I need to apply for a joint loan?

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A joint loan is given to two or more borrowers. With more than one borrower, you have more income to pay the loan, and it may be easier to qualify for a large loan. Also, additional borrowers may have better credit history and more collateral to help you qualify. If you’re married or would like to go in for a joint loan with either of your parents / siblings, it proves to be a more convenient approach to managing your money together.

Responsibility of the co-applicant in a joint loan

A co-applicant in a joint loan refers to a person, who applies along with the primary applicant, for a loan. This is done so that the income of the co-applicant can be used to supplement the borrower’s income and increase his/her eligibility or credit limit. As a co-applicant, you are completely responsible for the loan if your partner defaults or under any circumstances is unable to pay back the loan. Therefore a co-applicant’s credit score is also checked by lenders before deciding on the loan application. If a co-applicant’s credit score is low, it may negatively impact the loan application.

Both the borrowers’ credit score is affected by a joint loan

A joint account is reported on both individual’s credit reports. This is where issues arise resulting from differences that states who is responsible for paying the debt. If the responsible party does not pay on time or does not pay at all, that is reflected on the other party’s credit report as well. In addition, creditors can come after both parties for payments and collections. For example in a divorce even if the divorce settlement stated who was responsible for the debt, it won’t apply to the original agreement with the creditors, which listed both as responsible for the debt. On the other hand, both the borrowers’ credit score gets negatively impacted in case either of the partners default on the payments of the loan EMIs. Hence, it’s imperative that both borrowers on the loan should ensure paying the EMIs regularly on the due date, month on month.

With a fair understanding of the benefits of opting for a joint loan, given below are some Do’s and Don’ts one must consider before applying for a joint loan:

• Insist on having co-owners to be co-borrowers of the loan. However, the reverse is not necessary, banks do strongly suggest to have same person to become a co-owner and a co-borrower

• Though a joint loan requires both the applicants to furnish the necessary Know Your Customer (KYC) documents, make sure you check your CIBIL credit score and analyze your CIBIL credit information report before making the decision

• Ensure that you keep a track of the repayments and are aware of your liabilities in the event that variations are made to the terms and conditions of the loan

• Do not default on monthly installments as it will have a negative impact on both borrowers’ credit history

• In case of divorce ensure that your co-applicant is responsibly paying the EMIs

Guest Column byHarshala Chandorkar, Senior Vice President - Consumer Relations, CIBIL