Has a friend or family member asked you to take out a loan for them because they can't get one themselves? Before you say yes, there are some important things you need to know.
First, let’s cover the three common ways in which you can legally take out a loan:
When you apply for a loan in your name:
If you take out a joint loan with your partner or family member:
When you become a guarantor:
Sadly, it is possible for someone to take a loan out in your name without your knowledge, however it is illegal. Fraudsters can collect your personal information, and through identity theft, apply for a loan with your details. Although you may not receive any correspondence from the lender, the loan would likely show up on your credit history.
This is why it’s important to frequently check your credit report for any inaccuracies. If you suspect fraud, you should report it to the associated company as well as Action Fraud.
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, perhaps because they’re in poor physical or mental health.
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 if the lender believes there is not enough income to repay the loan).
Regardless of whether the loan is for you or someone else, when you take one out in your name, you are the only person who must legally pay it back. Even if your friend or family member promises to give you money each month, the lender will come to you - not them - if payments aren't made on time.
If you can't make the payments:
Ask yourself: Why can't this person get a loan themselves? If they can’t get a loan themselves, there’s likely a reason — bad credit, too much debt, or low income.
If you apply on their behalf but don’t tell the lender the truth, it could be considered fraud. Be honest about how the money will be used.
If you do decide to help someone by taking out a loan for them, create a clear agreement on how payments will be managed:
With a guarantor loan, your friend or family member takes out the loan themselves, and you act as their guarantor. This means:
But be careful. While this keeps the loan in their name, it still puts you at financial risk. If they miss payments, you’re legally responsible. As well as a damaged credit score, your relationship could also be at stake.
If you have doubts about the person’s ability to repay the loan, it's okay to say no. True friends and family will understand that:
Remember, if you’re facing issues with debt, you’re not alone. There are charities you can speak with for free, impartial advice, so get in contact with them as early as possible.
Disclaimer: We make every effort to ensure content is correct when published. Information on this website doesn't constitute financial advice, and we aren't responsible for the content of any external sites.
Zubin is a personal finance writer with an extensive background in the finance sector, working across management and operational roles. He applies his experience in customer communication to his writing, with the aim of simplifying content to help people better understand their finances.
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