Taking out a loan for someone else is possible, but it also carries a lot of risks. You could end up in debt yourself if the person you are borrowing for can’t afford to repay you, so you need to be sure that you’re making the right decision before agreeing to take out a loan on their behalf.
In this guide, Finance Rate tells you everything you need to know about taking out a loan on behalf of someone else, including the associated risks and alternative loan options to consider.
Can I borrow money for someone else?
You can take out a loan on behalf of another person. The loan will be in your name and you alone will be responsible for repaying the debt, regardless of whether the other party pays you back or not.
There is a great deal of risk associated with borrowing money on behalf of someone else because of this, but people do choose to borrow money for relatives or friends for a number of reasons, such as:
- The relative or friend already has a personal loan and wants to consolidate their debts, but is unable to do so due to their credit score
- The relative or friend is unable to get credit at all because of previous financial problems that still affect their credit score
- The relative or friend has recently moved to the UK and doesn’t have enough of a credit record to take out a loan or credit card
What options are available when borrowing for someone else?
There are several types of loans you can choose from when borrowing money for someone else, but the main options are:
- Personal loan: This is a type of unsecured loan that allows you to borrow relatively small amounts of money starting from around £1,000. The money can be used for any reason, with the exception of some standard restrictions such as using the money for investments or buying property.
- Secured loan: This type of loan requires you to use an asset, such as your house, as collateral. If you fall behind with repayments, the lender can repossess the asset to recoup the money you owe.
How do I decide which borrowing option is best for me?
If you do want to take out a loan for someone else, the option you choose will depend entirely on your own personal circumstances.
Personal loans can be a great option because you don’t have to put your own assets at risk, but you will need to have a good credit score if you want to be accepted and get a relatively low interest rate.
Secured loans, on the other hand, can be a good option if you want better interest rates or a larger sum of money – however, you risk losing your home if repayments are not made on time.
If you’re unsure about which loan to choose, it’s always best to seek financial advice to ensure you’re making the best decision for you.
What are the risks of taking out a loan for someone else?
If the person you’re borrowing for fails to pay you back, you’ll still have to keep up with the loan repayments even if it leaves you out of pocket.
If you miss a payment, it is your credit score that will take a hit – not the other person’s. You are legally responsible for repaying the debt even if you are borrowing on behalf of someone else.
Damaging your credit score could prevent you from getting a mortgage, buying a car, or even taking out a phone contract. Even if a lender does allow you credit, you’ll face higher interest rates and reduced limits.
What can I do to avoid this?
Only borrow money on behalf of people who you trust absolutely. If you’re not certain they can repay you, it’s not worth risking your own financial security to help them out.
Remember – there is usually a reason why they can’t get money from the bank themselves, and it may be because they have failed to pay back loans in the past.
If you do decide to borrow for someone else, get them to set up a standing order so they don’t forget to pay you or miss the payment date.
You should also make sure you don’t borrow more than you can afford to cover each month, ensuring you’ll still be able to make the repayments even if they don’t pay you back as promised.
What alternatives are there to borrowing for someone else?
If you’re hesitant to take on debt for a friend or family member, there are other ways that you can help.
- Use your savings: If you have enough money saved up, it might be a better option to lend money from your personal funds rather than take on debt. Even if the other person is unable to pay you back, you’ll be in a much better financial position than if you had to make repayments to a lender.
- Guarantor loan: With this type of loan, your friend or relative would take out the loan in their own name, but you act as a guarantor for the debt. This means that if they don’t make their repayments on time, you will be liable for the debt and will have to pay the owed money on their behalf.
If you need more information about the different types of loans that are out there, Finance Rate can help. We offer straightforward and unbiased information on all things finance, covering everything from loans to pensions and beyond.
Check out our loans guide to find out everything you need to know about taking out a loan for someone else, including the advantages and disadvantages of each option.