Here are some things to keep in mind if you are thinking of a joint loan.
FEATURE
By Diana ChaiWith the prices of property escalating way beyond most people’s reach, the only way you could likely own a home is to opt for a joint loan. Two incomes are of course better than one. But that isn’t the only reason you could be signing your John Hancock next to another person on a credit application. Perhaps a loved one has asked you to be guarantor or you yourself are in need of one. But whatever the reason, co-signing a loan is a big decision and will henceforth mean that your credit rating will be tied to that other person whom you just signed the documents with: For better or (financial ruin) worse.
With such high stakes, a joint loan account should be carefully considered. It is not to say you should not, under any circumstance, take out a joint loan but you may have to give much more thought. Here are some things to keep in mind if you are thinking of a joint loan.
What it means to co-sign
When you take a joint loan, you are essentially linking your credit history to the other person. You are now not only responsible for putting in your share of payment; you are jointly responsible for insuring that the other person pays their share too.
When you take a joint loan, you are essentially linking your credit history to the other person. You are now not only responsible for putting in your share of payment; you are jointly responsible for insuring that the other person pays their share too.
Standing as guarantor has been one of the top reasons many people end up bankrupt and unawares – you get saddled with the blame when the co-signee doesn’t pay up. Many guarantors remain unaware of their bankruptcy status right up until the office of the Director General of Insolvency starts calling.
To top it off, ending a joint loan can be a messy affair. If there is property involved; you may need to sell the asset or obtain refinancing if either one party should wish to retain it. Depending on your arrangement with the co-signee; you may need to ‘buy them out’ of their share in the property.
What risks are involved?
Most people would advise against taking a joint loan. It’s difficult to predict how financially responsible a person is going to be no matter how well you know them. Sometimes, due to extreme financial hardship, even a genuinely good paymaster could default on payment and both of you could land yourself in financial trouble. Tables could always turn too and you could find yourself being the one who defaults on repayment putting your co-signee at risk.
Most people would advise against taking a joint loan. It’s difficult to predict how financially responsible a person is going to be no matter how well you know them. Sometimes, due to extreme financial hardship, even a genuinely good paymaster could default on payment and both of you could land yourself in financial trouble. Tables could always turn too and you could find yourself being the one who defaults on repayment putting your co-signee at risk.
To pre-empt any such an undesirable outcome, discuss the risks involved with your co-signee at an early stage. Ensure both of you are aware and feel ready to take on the joint risk. If so, come up with a plan of action should either of you find yourself at risk of defaulting.
How to reduce the risks involved in joint loans
As a joint account holder, these are some steps you can take to reduce the risk for both yourself and your co-signee.
As a joint account holder, these are some steps you can take to reduce the risk for both yourself and your co-signee.
Take as small a loan as possible – The smaller the principal amount taken, the lesser the amount you have to pay back every month. Understandably, property prices are very high but do your best to take the bare minimum amount and avoid top-up renovation loans or any such thing that could add to your debt burden unnecessarily.
Request for payment updates from the bank – You can request notifications from your bank that are channelled to both of you and not the just the principle name on the account. This allows both of you to keep track of payments.
Keep detailed payment records – It’s easier to keep track if one person is assigned to pay the monthly instalments. Decide amongst yourselves who should do this and the other can provide a ‘check and balance’ system. The person designated to pay must do so at the stipulated time upon receiving the due contribution from the other party. The ‘scorekeeper’ must then take hold of the receipt of payment for record-keeping purposes.
Create a comprehensive exit plan – In cases of a possible default, come up with an agreement on what should be done to rectify the situation. This could mean selling the property and splitting the proceeds or the retaining party repaying the other for their contributions to the loan thus far.
It is important to realise that when you agree to take out a joint loan, you are also taking on responsibility for the other person’s personal finance habits to a certain extent. However, if both of you are committed to making the arrangement work and if all stopgap measures are adequately in place, you could very likely see the arrangement through to the end.
This article brought to you by Diana Chai from RinggitPlus.com. We believe all Malaysians should have access to free, accurate and independent personal finance information.
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