If you take out a loan then you are responsible for repaying it.
There are three ways you can legally take out a loan:
1. In your own name, i.e. a personal loan
2. With someone else, i.e. a partner
3. For someone else, i.e. as a guarantor
In this blog, we explain more about how each of these options works, but, more importantly, how you can be breaking the law if you take out a loan in any other way.
Taking a loan out in your own name
If you want to take out a loan, you will go through the following process.
First, you will apply and, once accepted, the money will go into your account for you to do what you want with. You’ll then repay it over the course of the repayment term with interest.
You’ll keep making repayments for the length of the term until the balance is clear. As you reach the end of your loan term, it may be possible to make a lump-sum payment to clear what’s left outstanding.
Whether you take out a homeowner or personal loan, you should apply for it in your own name. You are then solely responsible for repaying it.
Taking out a loan WITH someone else
You may want to take out a loan with someone else - your partner, for example.
In this case, the process is exactly the same but instead of just taking into account your finances, the lender will also take into account your partner’s.
This is a loan that you are both named on and so both responsible for.
Taking out a loan FOR someone else
Both of the options we’ve looked at so far are perfectly legal. You are borrowing the money for your own use and agreeing to pay it back.
Another option is that someone else applies for a loan in their name and asks you to act as guarantor. In this situation, they will receive the money – not you – and they will be responsible for repaying it. But, where a guarantor loan differs is that if they stop making their repayments, the lender expects you to take over.
Find out more about this option here.
You may agree to be a guarantor on someone’s loan – it’s common for parents to do this for their children, for example.
Power of Attorney
But while you can act as a guarantor for someone else taking out a loan, is it possible to actually apply and take out a loan in their name and on their behalf?
Well, the only way that you can legally take out a loan in someone else’s name is if you have Power of Attorney (POA) over their finances.
POA is granted when someone is unable to run their finances properly themselves, either because they’re in poor physical or mental health, for example.
If you have Power of Attorney over someone else’s finances and they wish to take out a loan, you will be in charge of applying for this on their behalf – if you think it’s in their best interests to do so.
The money from the loan is theirs, the debt will be in their name and they will be responsible for repaying it.
Bear in mind that, depending on why you have Power of Attorney, the applicant may struggle to be accepted for a loan (for example, if they are unable to work, they could be turned down once the lender realises they don’t have the money coming in to cover their repayments).
When is it not legal?
So far, we’ve outlined the main ways to legally take out a loan.
However, if you take out a loan in someone else’s name - either with or without their consent or knowledge - it is illegal and, quite simply, you are committing fraud. Even if you have permission from the person whose name you’re using, the lender you’re applying to will carry out all their checks on that person and not you when processing your application.
This is fraud because you are misleading the lender by making them think it’s someone else who’s applying to borrow from them.
And if someone asks to use your name and details so they can take out a loan, perhaps because their credit history isn’t up to scratch, we would caution against doing this. Learn more about this here.
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