Joint Loan Account: Here Is What You Need to Know

Obtaining a loan does not come for free. You must pay a significant amount of interest over the loan's term. There is also a processing and application fee that comes with the loan. If you are not careful, then the lender might also levy other charges on your loan. So, whether you are applying for a home loan or a business loan, it is best to share your liability with a business partner or a spouse, depending on the type of loan. A joint loan can help you in getting better interest rates and reduced fees.
 
Here is everything you should know about joint loans.
 

What is a joint loan account?

A joint loan is a type of credit account in which more than one borrower applies for, uses, and repays the loan. Most financial institutions will approve a joint loan for up to two borrowers. When applying for a home loan, you can include your spouse, siblings, or parents as joint applicants. In the case of a business loan, your business partner may become a joint applicant on the loan application.
 
Joint loans function in the same way as regular loans. In this case, you and the co-borrower must repay the principal amount plus the interest rate within the period specified in the loan agreement.
 

What are the benefits of a Joint Loan Account?

 
A joint loan comes with a host of benefits. A few of them include–
 

1. Higher loan amount

   When you apply for a huge amount as a home loan or a personal loan, the lender usually approves a loan with an EMI of 40-45% of your monthly income. Furthermore, various other factors influence the maximum amount you are eligible for. Hence, applying for a joint loan will result in income consideration for both parties, resulting in a significantly higher loan amount.
    

2. Tax relief

   If you wish to apply for a joint home loan, you and the co-borrower both receive a tax benefit. This type of loan provides additional tax advantage if the joint applicants are husband and wife. Here is how.
    
   Assume you and your wife applied for a Rs 45 lakh home loan. The lender sanctions a loan of up to Rs 30 lakhs based on your credit profile and Rs 15 lakhs based on your spouse's credit profile. This equates to the home loan share ratio of 2:1. 
    
   In this case, you and your spouse can jointly claim a tax benefit of Rs 7 lakhs. This includes Rs 3 lakhs (Rs 1.5 lakh + 1.5 lakh) for tax benefits on principal payments under Section 80C and Rs 4 lakhs (Rs 2 lakhs each) for tax benefits on interest payments under Section 24B.
    

3. Affordable repayments

   A joint loan account makes debt repayment more affordable. As per the example shown in the preceding section, the husband and wife share loan ownership in a 2:1 ratio. That means if the total debt EMI is Rs 60,000, one must pay the EMI of Rs 40,000 while the other must bear the EMI responsibility of Rs 20,000.
    

When is it a good idea to open a joint loan account?

 
Applying for a joint loan makes sense in the following two situations. 
 

1. Average credit score

   If you have an average credit score and have unintentionally missed a few EMIs on your previous loan, the lender might be hesitant to offer you a new loan. In this case, applying for a joint loan with your partner is the best option. It will make it easier for you to qualify for the loan, and you may also be able to get an affordable interest rate if the joint applicant has a stable job and a good income.
    

2. First-time borrower

   Getting your first loan is always hard if you are yet to start your credit journey. The lender has no way of evaluating your credit behavior and only has your salary certificate to analyze your repayment potential. In such cases, the lender will either reject the application or approve funds at a higher interest rate. Thus, the best way to deal with the situation is by applying for a loan with your partner. 
    

Also Read: Key Points to Take into Account Before Becoming a Loan Guarantor
 

Things to keep in mind when applying for a joint loan

 

• The joint applicant's repayment obligation is proportional to their share of the loan amount.

 

• The person you wish to add as a joint applicant must have a clean credit history, stable employment, and consistent income. 

 

• If a joint applicant fails to repay their portion of the debt, the repayment responsibility will fall on your shoulders.

 

• Both applicants will be required to submit the same documents at the time of loan application submission. If any of the applicants fail to provide the mandatory papers, the lender may reject the joint loan application.

 

• In the case of joint credit cards, which are rarely available, keeping track of expenses can be difficult, and you may end up delaying card payments and paying a high-interest rate.

 

What questions should you ask before adding someone as a joint applicant?

 
You must ask the following three questions before introducing someone as a joint applicant on your loan form.
 

1. Do you have a longstanding relationship with them?

   It is critical to only introduce someone you have known for a long time on your loan application. If you are aware of the individual's spending habits, employment status, and income, you can determine whether or not that person is suitable for becoming a co-borrower.
    

2. What is their credit behaviour?

   Apply only with someone whose credit behavior you are well aware of. You should know whether that person has previously defaulted on their debt, if they have a habit of EMI delays, if they consistently use more than 30% of their credit card limit, and so on. Having a thorough understanding of credit behavior will speed up the approval and disbursement processes.
    

3. Are there any other assets they could use during the financial crisis?

   After the pandemic, no one could claim to have a job security or a business that is protected from losses. As a result, it is critical to inquire with the person you want to introduce as a joint applicant about their cash reserves or liquid assets. If a job loss occurs, such assets will help with debt repayment.
    

Also Read: Simple Steps to Effectively Manage a Debt Repayment
 

To conclude

 
A joint loan is a lucrative option in many conditions. It lowers your repayment obligations, qualifies you for a maximum loan amount, and allows you to take advantage of higher tax benefits. However, before entering into a joint loan agreement, always research your co-applicant credit history, monthly income, and employment stability. It will assist you in avoiding a default situation in the future.