In the vast financial landscape, the question often arises: Should Married Couples Get a Joint Consolidation Loan? This article aims to provide a comprehensive answer by analyzing the associated advantages, potential pitfalls, and the factors which determine the suitability of such a decision.
When Two Become One: The Joint Loan Application
When a married couple decides to apply for a joint loan, they are essentially telling the lending institution that they intend to use their combined financial power to back their loan application. This combined power includes both their credit capacities and their combined income.
Indeed, there are certain benefits to applying for a joint consolidation loan.
When one partner’s debt-to-income ratio is too high, employing the income of the other partner may improve this crucial lending factor.
In situations where one partner has a less-than-stellar credit score, the second partner’s credit score may carry the application through to approval.
By enhancing the quality of your application and overall creditworthiness, a joint application may qualify you for a loan with a lower interest rate than the high debt spouse can obtain individually.
However, as with all financial decisions, there are certain drawbacks to consider. As co-borrowers, both individuals are legally obliged to repay the loan, creating a ‘joint and several’ liability. This means both parties are entirely liable to repay all the debt, potentially creating a significant financial risk for the spouse who is now taking on responsibility for the other spouse’s debt.
The Credit Score Conundrum
Lenders are essentially in the business of managing risk. Therefore, to qualify for a low rate consolidation loan, at least one applicant needs to possess a good credit score. This implies that the positive credit history of one spouse is used to counterbalance the negative history of the other. However, a joint application means that the debts impacting your spouse’s credit score can now affect yours as well.
By taking on new credit, your credit score could potentially drop.
Multiple applications lead to hard hits on your credit report, which can negatively affect your credit score.
A new loan can also increase your credit utilization ratio until you start paying down the consolidation loan.
The Marital Breakdown Factor
In the unfortunate event of a divorce or separation, the joint loan could pose additional problems. Despite any agreements between the two individuals, the lender will look to both parties to repay the debt.
Debt cannot be allocated in a divorce or separation agreement. While your separation agreement might call for an equal split of debts, or your spouse might agree to make the monthly payment because the debt was theirs originally, none of these agreements have any legal bearing on the lender.
Moreover, it is not possible to remove a name from a joint loan without the lender’s permission. In the event of a marital breakdown, this could leave one party with payments they cannot afford.
Marital Assets and Property: Should They Be Risked?
Yet another factor to ponder over is whether it is wise to risk family assets to consolidate unsecured debt like credit card debt.
Converting unsecured debt into a secured consolidation loan is one of the riskiest strategies one can adopt.
Should you own a home, a home equity loan or home equity line of credit may seem like an attractive approach to deal with one spouse’s problem debt. However, this strategy creates two financial risks: you are now liable for larger mortgage payments and, if you and your spouse default, you risk losing your home.
Income Stability: A Major Consideration
A common reason people unexpectedly file for bankruptcy or consumer proposal is a job loss or reduction in income. By consolidating debts with your spouse, both parties become equally responsible. If one spouse loses their job, the couple may no longer have the income capacity to keep up with the consolidation loan payments. The option for one spouse to file bankruptcy to deal with their separate debt, leaving the other financially stable, is off the table once you agree to consolidate your debt legally.
The Student Debt Dilemma
Student loan debt is an increasingly prevalent issue among young couples. Many enter into marriage already burdened with debt. If one spouse has been unable to earn enough to repay their student loans, it may be more prudent for them to consider student loan relief options rather than burdening both parties with ongoing loan repayment.
Student loan consolidation is not always a good idea as you can lose the tax benefits of the deductibility of interest on student loans.
The Big Question: Is a Joint Loan the Right Choice?
Problematic debt remains problematic, regardless of where it’s shifted. It may not be beneficial for either spouse to transfer bad debt to the other. This may not help either party to climb out of debt.
Before consolidating one spouse’s bad debts into a family debt, it may make more sense for the spouse with debt issues to consult with a Licensed Insolvency Trustee about loan forgiveness. The spouse with high consumer debt may want to consider filing a bankruptcy or consumer proposal as a form of debt relief instead of transferring the debt obligation to the other.
Maintaining personal responsibility for personal debts has a secondary benefit. This can preserve the credit rating and credit capacity of the spouse with good credit for future needs. That spouse can still qualify for a mortgage while both spouses save money for a down-payment after completing a consumer proposal, for example.
It is important to note that filing insolvency does not affect your spouse’s credit. This is one of the common misconceptions of how a bankruptcy filing impacts a spouse. The spouse filing insolvency can work to improve their credit without harming the credit of their partner.
In conclusion, the decision to consolidate your debt through a joint loan is a highly personal one. It should be made after careful consideration of factors such as who will make the monthly payments, what happens if your finances or relationship changes, and how refinancing with a joint consolidation loan will affect your future financial goals.
