Are you in a situation where a family member or friend is in need of a loan but can’t get one themselves – perhaps because they’ve got a poor credit history?
As a result, they may have asked you to take out a loan for them.
If you’re in this position, it’s vital you weigh up the points below before you make a decision.
You’ll be responsible for repaying the full loan
Regardless of how close your relationship is, if you do take out a loan for someone else, the only person legally responsible for repaying that money is you. As far as your agreement with your lender goes, you’re taking the money out in your name for you, so you – and only you – are legally responsible for repaying it.
It doesn’t matter whether or not the person makes repayments to you, as the lender will expect you to keep up with the loan repayments each month regardless. If you don’t have enough to cover the payment, this can cause serious stress as your credit history will likely be damaged and the lender may even take legal action against you. They certainly won’t chase the person you took out the loan for, as – in the lender’s eyes – that’s an unofficial agreement between the two of you.
Even if you do have the cash in savings to repay the loan, having to chase your friend or family member to get this money back could put a serious strain on your relationship.
So before you agree to take out a loan on their behalf, it’s important to consider why they’re asking you for the loan in the first place. If it’s because they have a poor credit history and can’t get credit elsewhere, you should consider whether this means they’ll struggle to repay you as well.
When you apply for the loan, the lender is likely to ask you what you’ll use the money for. You must be truthful about this, because if you say you plan to use it for yourself – for example, to pay for home improvements – and then lend all the cash to someone else, this could be classed as fraud. Some lenders give the option of giving the money away as a ‘gift’.
The person asking should be in a stable financial situation if you’re thinking of helping them to get a loan.
Set up an agreement
If you do choose to take out a loan and then give the money to someone else, you should set up an agreement between you both that they will pay money into your account on certain dates. A good way to enforce this is to ask that they set up a standing order to your bank account that covers the monthly payment.
Make sure that they set it to come into your account a few days before your payment to the lender is due, so you know you have enough money in your account.
Remember that a standing order isn’t a guarantee that the money will come into your account, as the payment will fail if they don’t have enough cash in their own bank account to make it. This is why it’s especially important that you weigh up whether you are happy to take this risk.
Because of the risk involved in taking out a loan and lending that money to someone else, we would urge caution if you’re considering this – in fact, we’d suggest you consider another option altogether.
What are guarantor loans?
With a guarantor loan, you don’t have to take the loan out in your name. Your friend or family member takes out the loan with a special lender and you put your name down as guarantor. This means, in a sense, they can piggyback on your credit history so they can get a loan when they might not be able to otherwise.
There are still risks to be aware of before you agree to this option, as you’ll be held equally responsible for repaying the loan if your friend or family member can’t. And although the guarantor loan won’t show up on your credit history, if they miss payments this will show, just as it will if you miss repayments when the lender chases you for the money.
The lender can also take legal action against both of you if neither of you are able to pay, all of which could be very damaging to your credit history.
It can be tough if someone is piling the pressure on you to take out a loan on their behalf, but it’s really important to hold your ground if you’re being asked to do this and you have doubts. If you’re worried about their history of making payments on time, you may have to be firm with them and say no for now – although we understand this is much easier said than done if you have a close relationship.
Try to remember that a friend or family member shouldn’t be backing you into a corner to take out a loan for them. Borrowing money is a big financial commitment and they must understand that it’s not something to be taken lightly.
If you don’t have the savings set aside to cover repaying the loan, or you have doubts that they’ll be able to repay you, it’s best to say no.
Disclaimer: All information and links are correct at the time of publishing.