Can I Take Out A Loan For Someone Else?
Can I take a loan on behalf of someone else?
You can take a loan on behalf of another party. The loan is in your name and you will be responsible for repaying the debt, whether the other party pays you back or not, so you will be required to obtain independent legal advice on the risk.
You may want to take out a loan for someone else, for any number of reasons. Often, the person benefiting from the loan cannot get credit and asks a relative or trusted friend to take the loan out in their own name.
Another common example is where two owners might mortgage their property to release funds for one party but not the other, such as to refinance a pre-existing loan in one party's sole name.
This article will look at a few options which are best suited to different circumstances.
Guarantor Loan
This is not quite like taking out a loan on someone else's behalf. They take a loan out in their own name, but you guarantee it. The person who needs the money may not have a strong enough credit score to obtain the loan by themself. If you have a better credit rating or income, you can 'guarantee' the loan by promising to pay the debt if your friend fails to.
If your friend makes their repayment(s) on time then this option can keep you relatively uninvolved, while enabling your friend to obtain the finance they need. However, if anything goes wrong, then you will be responsible for repaying the debt, which is legally enforceable. Failure to do so on time will impact your credit rating.
The limitation to this option is that the borrower would need to be able to get a loan in their name at all. If they are unable to get a loan in their own name, you'd need to get a loan in yours.
Unsecured Personal Loan
You could take a loan out in your name. If it is relatively small compared with your income and your credit rating is good, then it can be unsecured, which means that you don't have to put any assets (house, car etc.) up as collateral. You will be responsible for making the repayments yourself.
Your friend may agree to reimburse you for them, but you have no legal recurse against them if they do not, unless you execute a separate loan agreement between yourselves. Even with a separate loan agreement with your friend, you will still have to pay the lender in full and on time, before pursuing your friend for the funds in accordance with your personal loan agreement.
The limitation to this option is in the size of the loan. Without security, you won't be able to borrow as much.
Secured personal loan
This is similar to an unsecured personal loan, however you 'secure' the loan against an asset you hold. This can be almost any high value item, such as a house, car, or precious antique.
The considerations are much the same as an unsecured loan but by securing the loan against the asset, you can borrow more. You also risk losing the secured asset to the lender, who will be entitled to possess the asset and sell it to recover their loan to you.
You will not be able to use the asset as security if you do not own it outright (for example, a car which you are paying off monthly, or a property which you bought with a mortgage) unless, you have paid enough of it off that the equity you own is sufficient to secure the additional loan.
While you should always be very careful when considering 'Can I take out a loan for someone else?' this option is where you need to begin to really consider 'Am I prepared to lose this money or this asset for this person?'. If they don't pay you back and you can't afford to repay the loan, then you could lose your car, for example, as well as your friendship.
Borrower and Proprietor Mortgage
This is a loan secured against your house. If you already have a mortgage on the property, then this would be registered as a second charge. Your lender won't make the loan unless you own a big enough proportion of the equity in the house.
For example, if you've just bought your first home with a 5% deposit, you only own 5% of the equity and you owe 95% of the value of the house - It is highly unlikely that you will be able to borrow any more against the property.
If you own the house outright or you have enough equity to secure a second charge, then you can take out what is called a borrower and proprietor mortgage. This is because you are a) the borrower and b) the proprietor (owner) of the mortgaged property, but, you will not be the beneficiary of the loan.
Example one
This option happens most often where your joint owner has other debts, for example a high interest loan, or they want to release money to purchase something in their sole name - such as a business premises. In order to release those funds from the equity they own in the property they share, they want to mortgage the property. You will be jointly and severally liable for the mortgage, but will not benefit from the loan. Because you're taking on the risk without the reward, you must receive independent legal advice.
Example two
This might also happen when you own the house alone, but you are releasing funds from the equity on your house to benefit another person. For example, you want to give a friend the money to use as deposit on their own home.
Even as sole borrower and sole proprietor you will still need to get independent legal advice because you are taking the liability of the loan (and risking your property!), but not benefiting from the funds.
Why do I need independent legal advice if I take out a loan for someone else?
Lenders have a professional duty of care to you, the borrower. It would be irresponsible for them to let you borrow money for someone else without making sure you understand that you will be personally liable for the debt, as well as the risk to your personal assets if you cannot repay the loan and interest.
In order to satisfy the lender that you know what you're agreeing to, an independent solicitor, such as Parachute Law Solicitors, must explain the risks to you and provide a certificate to confirm they are happy that you are making an informed decision of your own volition, under no pressure from anyone else.
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