Combining finances often makes sense for long-term partners (whether married or not). It’s a way to commit more to each other and simplify financial affairs. But what about debt?
According to a 2017 survey by MagnifyMoney, money problems were the primary cause of one in five divorces. And considering that 27% of Americans don’t have any sort of emergency fund, debt can quickly become a big problem. Consolidating high-interest debt can decrease some of your financial pressure.
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Married couples and debt
The rules are pretty straightforward.
If you and your spouse take out debt together, either before or after the marriage, you are equally responsible for repayment. The debt includes credit cards, lines of credit and other joint accounts.
If one partner has taken on debt while single (student loans, for example), this debt remains their sole responsibility after the marriage.
If you borrow money alone while married and only your name appears on the credit account, you will likely be solely responsible for repaying the debt in the case of separation or divorce. There are two exceptions, though.
- If the money was borrowed for living costs or other shared expenses
- If you live in a community property state. Almost all debt acquired during a marriage becomes a joint responsibility in a community property state. The following are community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
Best joint debt consolidation loan providers for married couples
Here are the best lenders that allow joint loan options for debt consolidation for married couples.
- APR: 2.49% to 19.99%
- Loan amount: Up to $100,000
- Loan terms: 24 to 84 months
- Credit check: Yes
- Minimum credit score: 670
- Application process: Apply online and receive a response during business hours which typically won’t take longer than two business days.
- Prequalification: None
- Other important information: No origination fees, prepayment penalty, or late fees. Joint application option and autopay discount. You can get your money the same day your loan is approved.
- APR: 7.99% to 29.99%
- Loan amount: $7,500 up to $50,000
- Loan terms: 2 to 5 years
- Credit check: Yes
- Minimum credit score: 600
- Application process: Apply online; a loan consultant will contact you if you qualify. If you don’t qualify, the lender will notify you by mail. The majority of customers receive a loan decision the same day they apply. The lender says it can fund a loan within three days of approval
- Prequalification: Yes, with a soft credit check that won’t harm your score
- Other important information: They charge origination fees (1.99% to 4.99%), no discount for autopay, there’s no secured or co-signed loan option, the debt-to-income ratio is 45% excluding mortgage, you need a minimum of 3 years of credit history and no bankruptcies in the last two years. They offer lender discounts up to six percentage points off with a co-borrower on the application. They give you a rate discount of up to five percentage points off if you show substantial retirement savings (at least $25,000 and $40,000 to get the most significant discount). And there is a direct pay discount when funds are sent to the creditors directly for four percent off (at least 85% of the funds sent to creditors).
- APR: 5.74% to 35.99%
- Loan amount: $5,000 up to $100,000
- Loan terms: 24 to 60 months
- Credit check: A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being prequalified.
- Minimum credit score: 680
- Application process: Their loan applications begin our initial review within one business day, and most of our applications are completed within two business. The application process is completed entirely online.
- Prequalification: Yes, online with a soft pull.
- Other important information: Low rates, no origination fees, no prepayment fees, or other “hidden fees,” You can view rates in as little as 60 seconds. You have access to customer support seven days a week.
Should married couples consolidate debt?
It depends. Is it joint debt, or is one spouse responsible? Do you live in a community property state? If so, consolidation is probably your best option. Does one spouse have a significantly better credit score than the other? If so, a joint application can boost your chances of approval.
Planning for the worst
No one wants to plan for the worst-case scenario, but if you divorce or separate and your spouse stops making payments, you will be expected to repay the debt. Discuss debt specifics before the wedding. If necessary, set up a prenup.
A prenuptial or pre-marital agreement can be a handy tool for both husband and wife to protect their pre-marital assets, create certainty of how the assets will be distributed if the parties would divorce, and help preserve the parties’ lifestyle after divorce. In the case of debt, a prenuptial agreement can ensure that debts are handled responsibly. While debt may not always be a comfortable conversation, a prenuptial agreement can give a couple a clear picture of their financial status at the start of a marriage.
Divorce or separation agreements can’t allocate debt. Though you may agree to split the debts 50-50, or your spouse agrees to take on a monthly loan payment for a debt they incurred, these agreements have no legal impact on your lender. Additionally, you can’t have your name removed from a joint loan without getting approval from the lender.
Marital assets and property
Are you willing to risk any family assets to consolidate unsecured debt? Risking this can be tricky and should be discussed with your partner.
Mortgage refinancing or using home equity loans or lines of credit may seem like an ideal way to consolidate loans and credit card debt, but merging family debt and a mortgage creates two significant risks:
- The larger loan and higher interest rates could increase your mortgage payment
- You could lose your home if you can’t afford the higher mortgage payments
It could be an excellent option for those with a significant amount of equity in their home and the discipline to stay within their means when it comes to borrowing. But using home equity to consolidate debt is not the right choice for everyone, especially if you are not responsible for debt management or repayment.
Credit score issues
At least one applicant will need a good credit score, which may be enough to override your spouse’s poor credit score. However, a joint application means that any debts dragging down your spouse’s credit score and your excellent credit score could be knocked down. Your score may also fall because you’ve taken on new credit or had multiple applications or hard pulls.
Look through your credit reports carefully to ensure all the information is correct. Errors in your credit reports can negatively affect your credit scores and ability to get a loan. Discuss your credit scores and credit history and see where you can improve your scores. Reviewing your credit reports can also help you monitor identity theft and fraud.
A new loan can also increase your credit utilization ratio.
Relationships are hard enough. According to Merrill Edge Report, 60% of people rarely discuss their debt with their significant other. According to Student Loan Hero, which is owned by Lending Tree, 24% of student loan borrowers keep their student loans a secret from their partners.
Suppose one spouse struggles with student debt (particularly federal student loans). And thanks to student loans, many young couples are already entering marriage with debt. In that case, it may make more sense to seek student loan debt relief rather than a joint consolidation loan, mainly because you could lose certain tax benefits.
The U.S. Department of Education offers some student loan forgiveness programs. Some of the regulations proposed to alleviate student loan debt are:
- for borrowers whose schools closed or lied to them
- who are totally and permanently disabled
- for public service workers who have met their commitments under the Public Service Loan Forgiveness (PSLF) program
There are regulations for stopping interest capitalization on those loans when unpaid interest is added onto the principal, increasing what you owe.
And for those who have disputes with their universities, you can get your day in court and hold them accountable for their wrongdoings.
Learn more about the student debt relief programs and see if you qualify at: Education Department Releases Proposed Regulations to Expand and Improve Targeted Relief Programs.
Did your spouse bring debt into your marriage? Or did you already have significant debt before your marriage? Watch this video to find out how to handle the situation.
Pros and cons of using personal loans to consolidate debt
It’s important for couples to weigh the pros and cons before making any decisions about debt consolidation.
- If one spouse’s debt-to-income ratio is too high, the other spouse’s income can improve the number.
- If one partner has a poor credit score, the co-signing spouse may boost the chances of approval or help qualify for better loan terms
- You might be able to repay your debt faster due to a lower interest rate
- With better overall creditworthiness, you may qualify for a lower interest rate
- You will have lower monthly payments since you will have a lower interest rate with a longer term
- You can save money on late fees if you’re making late payments
- One streamlined, simplified monthly bill to worry about
- You both will be legally obligated to make the monthly payments, even if your partner takes the debt on solely
- Both co-borrowers are 100% liable for repayment
- Increased debt load
Alternatives to a debt consolidation loan
- Credit counseling: Sometimes, knowing where your money is going with the help of a credit counselor and where to cut back can be the key to your debt relief. Good spending habits are also crucial to helping you stay out of debt. Credit counselors are certified and trained in consumer credit, money and debt management, and budgeting. Counselors discuss your financial situation with you and help you develop a personalized plan to solve your money problems.
- Credit card balance transfer: This is an excellent option if your credit is good enough. Apply for a new credit card with an introductory APR of 0%. Then transfer your high-interest debts to the new card. You’ll pay a balance transfer fee, but you can save quite a bit of interest if you can pay off your new card within the promotional period — usually 12 to 18 months. Note that you won’t get cash back on balance transfers.
- Debt settlement: Debt settlement programs typically are for-profit companies and involve the company negotiating with your creditors to allow you to pay a “settlement” to resolve your debt. The settlement is a lump sum less than the total amount you owe. The program asks that you set aside a specific amount of money every month in an escrow account to accumulate enough savings to pay off a settlement that is reached eventually.
The bottom line
While consolidating your debt can help pay down what you owe faster, it may or may not keep you out of the debt cycle. It can be a valuable means to streamline and ease the burden of high-interest rate debt, but the most important aspect is figuring out what got you into this situation in the first place.
Know the root causes and seek help from a credit counselor who can discuss your financial picture and formulate a healthy roadmap to avoid falling into a future debt cycle. And start crafting a budget plan to build a solid financial foundation, so debt won’t become an issue in the future.
For debt consolidation loans for a married couple, each of you will need:
Proof of income – this is one of the essential debt consolidation qualifications. Lenders will want to know that you have the financial means to meet the loan terms. You will need tax returns, pay stubs, bank statements, W-2s, or other proof of income. Gift letters, photo IDs, rental history, or mortgage statements.
Credit history – lenders will check your payment history and pull your credit report.
Financial stability – lenders want to know you’re a reasonable financial risk.
Equity – collateral such as home equity is one of the most common debt consolidation qualifications for larger loans.
Pro tip: Before applying for any loan, you will want to pull your credit report to check for any erroneous information and correct them. Next, check where you can improve your scores and seek the advice of a credit counselor if needed to see what areas you can improve your score to get a better interest rate.
Refinancing a mortgage to consolidate debt largely depends on how much you owe.
A cash-out refinance can help you consolidate your debt by capitalizing on low mortgage interest rates while tapping into your home’s equity. You will need to know how much equity is in your home. You will need over 20% built-up equity to avoid paying private mortgage insurance if the equity falls below 20%.
If you end up paying extra insurance, you will need to work out the math on the actual cost of savings with not only the additional insurance but the total closing costs of obtaining a new loan.
Refinancing your mortgage to pay off credit card debt is a big decision and should only be considered if your debt reaches the tens of thousands of dollars and grows via interest every day. It’s generally not a good solution for an amount, such as a few hundred or a thousand dollars, that you may be able to tackle with a long-term repayment effort.
In the past, it was rare for married couples to have separate bank accounts. But recently, separate accounts have become more common. A survey by Bank of America found that 28% of millennial couples are forgoing joint bank accounts and keeping their finances separate.
Having a separate bank account in marriage gives you a sense of financial independence, self-identity, and empowerment. Some people out-earn their husbands by a considerable margin and don’t like the idea of splitting the difference, no matter how educated or progressive they are.
Ultimately, it is a personal choice to be discussed between the couple. A happy medium could be having a joint account for all common expenses and still having a separate bank account. Couples with joint accounts may find it easier to keep track of their finances because all expenses come from one account. But having a separate bank account allows you to keep your independence, privacy, and financial freedom to save or spend as you want.