Taking A Joint Loan? Here’s How It Can Hurt Your Credit Score

When you're planning a big-ticket purchase like a home or a car, taking a joint loan could be a smart way to improve your eligibility. After all, two incomes are better than one, right? Applying for a loan with a co-applicant could help you borrow a higher amount with quick approvals.

Several banks and non-banking financial companies (NBFCs) allow to jointly apply for a home loan or a car loan with your spouse and parents. However, siblings, relatives, or friends cannot be co-applicants.  

While a joint loan can increase your borrowing capacity, it also comes with hidden risks, especially for your credit score.

A joint loan means shared responsibility. Both borrowers are equally liable to repay the loan. If everything goes smoothly and repayments are made on time, credit scores for both borrowers can improve. But if there’s a missed payment, it will negatively affect the credit score of both.

Let’s take a look at key factors to consider before applying for a joint home loan or car loan.

Many people misunderstand joint loans, assuming that only the primary applicant’s credit score will be impacted. In reality, lenders report the repayment status of joint loans on both borrowers’ credit reports. Any late payment, default, or settlement reflects on the credit profiles of the two borrowers.

Let’s say you’ve taken a joint home loan with your spouse. If your spouse forgets to pay an EMI while you're travelling, the missed payment will show up on both your credit reports. This negative reporting can lower your credit score by several points, affecting your ability to take future loans or credit cards.

A joint loan ties your financial health to another person’s discipline and income stability. If your co-borrower faces a financial setback like job loss, medical emergency, or business failure, they might struggle to make their share of payments. You’d be legally required to cover the shortfall to avoid default. Even if you’re financially stable, taking on their burden could strain your budget, leading to late payments on other commitments and further damaging your credit score.

A joint loan adds to your total outstanding debt, even if you’re not the one primarily paying it. Lenders consider your debt-to-income (DTI) ratio when evaluating new loan applications. A high DTI ratio makes you look riskier as a borrower.

Many people assume they can remove their name from a joint loan later. In reality, removing a co-borrower requires the lender’s approval and usually involves refinancing the loan under a single name. This process isn’t always feasible, especially if the co-borrower’s income or credit profile alone doesn’t qualify.

If you’re considering a joint loan, be clear about repayment responsibilities before applying. Set up automatic payments to avoid missed EMIs. Monitor your loan account regularly. You might also need to discuss the repayment plan with your co-borrower, outlining what happens if either party is unable to pay off the loan on time.

Finally, think twice before co-signing or taking a joint loan. It’s not just about trust, it’s about protecting your financial future.