While it's possible to take out a loan on someone else's behalf, it carries a lot of risk. Make sure the person you are borrowing for can afford to repay you, or you could be saddled with an unwanted debt. It’s important to protect your own credit rating, so you need to be sure before you borrow money on someone else’s behalf.
There are some circumstances when you might be asked to borrow on someone else's behalf. These include when:
A family member or friend already has a personal loan and wants to consolidate their debts, but is unable to do so due to their credit score
A family member or friend cannot get credit at all because of previous financial problems that still impact their credit score
Someone has recently moved to the UK and doesn't have enough of a credit record to take out a loan or credit card
It isn't illegal to take out a loan for someone else, because as far as the lender is concerned, it'll be your name on the loan agreement, and you will be responsible for repaying the loan. So, any consequences of missing a payment will be on you.
Be warned, the agreement between you and the person you’re helping is private, which means the lender won’t be interested if they stop paying you and will expect you to keep meeting the repayments.
A personal loan: This is an unsecured loan you can apply for in your name only. You can use the money for any reason, except for some standard restrictions such as using the money for investments or buying property.
A secured loan: A secured loan uses an asset as collateral to cover the debt in case you cannot repay it – for example, your house or car. The risk of a secured loan is that if you're unable to repay the loan, the lender can repossess the asset to recoup the loan.
A guarantor loan: This is when someone takes out a loan in their own name, but you act as a guarantor for the debt. If they don’t make their payments on time, you will be liable for the debt and expected to pay up.
If the person for whom you borrowed the money fails to pay you what they promised, you’ll still have to keep making the loan repayments even if it leaves you out of pocket.
This is important, because if you miss a payment or refuse to pay back the loan, it’s your credit score that will take a hit, rather than the other person. It’s also you that could be subjected to county court judgments or have your debt sold to a debt collection agency.
This is because you are legally responsible for repaying the debt even if you are borrowing on behalf of someone else.
Damaging your credit rating is bad news as it can make it harder to borrow in the future. This could prevent you from getting a mortgage, buying a car or even taking out a phone contract. Even when you are allowed credit, you'll face higher interest rates and reduced limits.
To avoid this, make sure you’re lending to someone you trust absolutely and get them to set up a direct debit or standing order so they can’t forget to pay you or miss the payment date. Remember there is usually a reason why they can’t get money from the bank, which may be because they have failed to pay back loans in the past. Don’t borrow more than you can afford to cover each month, even if they don’t pay you as promised.
Here is more on how secured and unsecured loans work.
If you're hesitant to take on debt to help a friend or family member, there are other ways you can help.
Use your savings: If you have enough savings, it might be preferable to lending money from your personal funds rather than taking on debt. Even if your friend or relative is unable to pay you back, you won't be saddled with unwanted debt.
Read more about lending to friends.
A guarantor loan: This is a type of loan that helps people with poor or no credit borrow for themselves. You act as a guarantor, meaning you are linked to the loan and will be responsible for repaying the loan if they cannot.
This saves you from taking on debt personally, but you are still responsible as a guarantor if the borrower is unable to repay the loan.
Here is more about how to decide if you should be a guarantor on a loan.