Joint Car Loans - The Definitive New Zealand Guide

Our guide explains the pros and cons of joint car loans, how they're different from having a guarantor, how to navigate applications, loan examples, and FAQs.

Updated 4 April 2024

Summary:

Joint car loans involve two or more people signing a car loan contract where the money is used to buy a car.
Unlike individual loans, where a single borrower is solely responsible for repayments, joint car loans share this obligation among all parties involved.

A joint car loan will usually be a contract between the lender and two (or more) borrowers with the following features:

Shared repayment responsibility: Each party is equally responsible for the repayments, and if one party misses a repayment, the other borrower must cover the shortfall to avoid the car being repossessed.
Credit and affordability assessments of both borrowers: When two (or more) people borrow, their combined earning power and affordability often lead to larger loan amounts and/or better interest rates than an individual loan.
Legal binding terms: All parties in a joint car loan are legally bound to the loan terms, and any default or late payment can affect the credit histories of all the joint borrowers.

Our guide covers:

Know This First: Who are the people most likely to apply for a joint car loan?

While every application is different, couples and family members are most common. We explain the reason for each in detail:

Couples: Joint car loans are popular among couples, whether married or in long-term relationships, who share the use of the vehicle. It's an effective way to pool financial resources for a significant purchase like a car and benefit from lower interest rates if both applicants have jobs.
Family Members: Young adult children and their parents (or siblings) often choose a joint car loan to assist one another in acquiring a car. This is because younger New Zealanders increasingly lack a credit history, and under CCCFA, it can be difficult to establish affordability.

Pros and Cons of Joint Car Loans

While joint car loans benefit borrowers, the wrong person or people on the loan contract can lead to disaster, as our list explains:

Pros:

Potentially higher loan amounts and lower interest rates: Combining incomes can increase the total amount you're eligible to borrow and lower interest rates, as lenders will consider the combined financial strength of all applicants.
Shared financial responsibility: The ongoing repayment burden is shared among everyone who signed the car loan contract, lowering the default risk.
Better approval odds: If one applicant has a weaker credit profile and low affordability, pairing up with someone with a stronger credit history can improve his or her chances of approval.

Cons:

Shared debt responsibility: If one party fails to make payments, the other is still responsible. This often causes conflicts and strains personal relationships, especially if there are hardship issues.
Impact on credit history: Any default or missed payments will affect the credit histories of all parties on the loan, which has flow-on consequences for borrowing later.
Complex if someone wants out: If one party wants out of the loan, joint car loans become challenging to restructure or refinance. Usually, this leads to selling the car and repaying the loan because joint car loan contracts are not set up to have borrowers quit their contracts.

Joint Car Loans vs Car Loan Guarantors & Understanding the Difference

If you're struggling to get car finance alone, you can apply with someone else or find a guarantor. However, there are a few differences to be aware of:

1. Responsibility in loan repayment:

In a joint car loan, both parties (e.g. the co-borrowers) share equal responsibility for the repayments. If one party cannot contribute their share, the other co-borrower(s) must cover the entire loan amount. This shared responsibility is a key characteristic of joint car loans.
However, with a car loan guarantor, the guarantor does not have immediate responsibility for monthly payments. Their obligation only kicks in if the primary borrower defaults on the loan.
This means the guarantor is a safety net to cover repayments but has no monthly obligation.
Guarantors don't own the vehicle at the end of the loan term - that's a benefit for the borrower.

2. Credit and income considerations:

When applying for a joint car loan, all parties' incomes, affordability, and credit histories are considered, which can lead to a higher loan amount and/or lower interest rate being offered by the lender.
With a guarantor, the loan amount and terms are primarily based on the borrower's financial situation, with the guarantor as a backup.

3. Financial commitment and risks:

Being a co-borrower in a joint loan is a significant and ongoing financial commitment with shared responsibility from the start.
In contrast, a guarantor is only liable if the borrower defaults. The lender will ask the guarantor to make repayments to avoid default. If they don't, their credit history will be impacted.

4. Your finances will determine if a joint car loan or guarantor is suitable:

Joint car loans are arguably most suitable when the parties are sharing the use of the car, like couples or business partners.
In contrast, a guarantor arrangement is usually more suitable when the borrower can't get a car loan because of their income, credit history, or other reasons and needs a financially stable person to back their loan.

Applying for a Joint Car Loan - Key Criteria

The process for joint car loan applications mirrors individual applications in many ways. We break down the key eligibility requirements and steps involved, which all applicants need to meet and provide:

Residency and Age: Applicants generally need to be New Zealand residents. The minimum age requirement is typically 18 years for both applicants.
Income Verification: Proof of income is crucial, and lenders will need to see payslips and bank statements.
Credit History: Credit profiles play a significant role in the approval process.
Documentation: Commonly required documents include proof of identity (such as a NZ driver's licence), proof of residence (like a power bill or bank statement), and income verification documents.

The loan application process typically follows these steps:

Shortlist suitable vehicles: Research the car you wish to purchase before applying to get an idea of the price and ensure it's affordable for all applicants.
Loan Calculation: Use online car finance calculators to estimate the loan amount you are eligible for based on your income and expenses.
Apply: Most car lenders offer an online application process, and you may also decide to work with a car loan broker. You'll need to fill out the application form with all the required details of both applicants. You'll need to prepare all necessary documents, including income proof, identity verification, a copy of your New Zealand passport and residence proof.
Verification and Approval: The lender will verify the details and assess your application; a decision usually comes within a couple of working days. If approved, you'll be presented with an offer specifying the interest rate, fees, and repayments.
Loan Settlement: If you agree to the terms, the loan will be paid, and you can buy the vehicle.
Repayment: The loan agreement will set out repayment terms, typically including monthly repayments plus interest and other associated fees.

Sharing the Repayments - What You Need to Know

Joint car loans can cause problems for borrowers unless the terms and responsibilities are understood and followed from day one. These include:

Equal and credit liability: All borrowers are equally liable for the debt. If a co-borrower defaults, the remaining borrower(s) are responsible for the entire debt repayment. This means the loan and its repayment history will affect the credit history of all borrowers.
Clear communication is critical: It's essential to agree on how repayments will be managed, set expectations, and plan for scenarios in which one borrower might not be able to make their share of the payment.
Repayment management is up to the borrowers: Some may split the payment equally, while others might allocate different amounts based on their income or agreement. What's important is that the payments are always made on time without any stress or complications.

The Ups and Downs of Joint Car Loans - Real-Life Examples to Explain the Risks and Benefits

Joint car loans are not without their risks, and we outline examples of where they work and when they can be problematic to help you decide the best loan for your needs.

Scenario 1: Successful Collaboration

Natalie and Matt, a married couple in Wellington, decided to get a joint car loan to purchase a new family car. They both had stable jobs and a strong credit history.

What Went Right:

Shared Responsibility: Both contributed equally to the monthly payments, easing the financial burden on each other.
Higher Loan Amount: With their combined incomes, they qualified for a loan sufficient to buy a decent, long-lasting car they won't need to replace anytime soon.
They successfully paid the loan without any issues, and the car added convenience to their family life.

Scenario 2: Unforeseen Challenges

Sarah and her best friend Megan, both recent graduates in Auckland, took a joint car loan to buy a car for their daily commute.

What Went Wrong:

Financial Instability: Megan lost her job when her team was laid off, making contributing to the loan payments difficult. This caused problems for both of their credit histories, as there were a few late payments, and Sarah had to cover the loan by herself.
Relationship Strain: The financial stress led to tensions in their friendship. They struggled with payments, and eventually, Sarah had to shoulder the entire burden, straining her finances and their friendship.

Scenario 3: Mixed Outcome

Mike and his business partner, running a business in Christchurch, took a joint car loan for a company vehicle.

What Went Right and Wrong:

Business Advantage: The car benefitted business operations, increasing their revenue.
Disagreement on Use: Differences in opinion on the car's usage led to disagreements —personal use crept in, and there was resentment and distrust.
Shared Liability: Business slowed down, which meant making payments became challenging and affected both partners financially.
While the car helped in business, the financial stress and disagreements created challenges in their partnership.

Frequently Asked Questions

What makes joint car loans different?

Joint car loans are characterised by shared repayment responsibility among all parties involved. The loan's payment history influences each borrower's credit profile. Unlike individual loans, where one person is solely responsible for repayments, joint loans share this obligation, potentially increasing loan eligibility and amount.

What happens when we want to sell the car bought with a joint car loan?

Selling a car financed through a joint loan requires the agreement of all parties on the division of proceeds. It's crucial to decide this upfront or at the time of sale. If there's a remaining balance on the loan, it must be cleared before or from the sale proceeds, with any surplus then distributed as agreed upon. Our guide to selling a car loan with finance owing has more information.

Can I make a hardship application if a joint borrower can't pay?

If one party in a joint car loan faces financial difficulties, hardship assistance may be available. Both borrowers should communicate with the lender as soon as possible to explain the situation. Our guide on managing car loan repayments during financial hardship explains the process further.