October 15, 2018

Merits and Consequences of Joint Debt

You may encounter situations where someone you know approaches you for assistance in obtaining a loan. It could be your own spouse, child or friend. If you have good credit, you may consider helping them. Before agreeing, you should consider the merits and consequences and investigate all options. It may be better overall for both parties in some circumstances but where the individual requiring help is insolvent and unable to pay their debts, facing legal action or garnishees, it may be better to investigate other options. A licensed insolvency trustee will be able to outline the options and risks to you in assuming joint debt or the other individual in dealing with their own debt.

Merits

Consequences

Credit rating

Where one individual has a low credit rating or significant debt, they may not be able to obtain an affordable loan or even obtain a loan without a cosigner or guarantor.

The higher credit rating individual will have the loan reflected on their credit report which will reduce their own borrowing capacity.

Interest rate

The interest rate obtained on the joint debt may be significantly lower than the rate offered to an individual with a lower credit score.

The interest rate for the joint debt may be higher than the guarantor would have to pay on their own. This could have a significant impact on borrowing cost for a larger loan such as a mortgage.

Repayment capability

Where the loan is a consolidation of higher interest loans, the monthly repayment will likely be significantly lower than the prior minimum payments and thereby reduce repayment period or avoid default.

Both individuals are fully responsible for a joint loan so, if one is unable to pay, the other becomes personally liable for making the payments. This should be considered prior to taking out the loan.

Securing against asset

Securing an asset against a loan, such as a vehicle or equity in a home, will generally result in a lower interest rate making the loan more affordable.

Securing your asset against the loan, particularly where the loan has no benefit to you such as cosigning a child's auto loan or your spouse's debt, etc., puts your asset at risk.

Default

If one individual is not able to pay on a temporary basis, such as job loss or illness, the cosigner or guarantor may be able to assist until the individual is able to start payments again thus preventing default.

Where the other individual defaults on the debt, you become personally responsible for 100% of the balance. It is not split between the two of you.

Debora Kwasnicky