Whether you are young and have limited credit history, or have a poor credit score due to problems in the past, it may be tempting to ask someone to take out a personal loan on your behalf. It isn’t against the law to do this, so it really comes down to the trust between the person who needs the loan and the person who will be taking it out on their behalf, and the arrangement they come to in relation to paying off the loan.
However, taking out a personal loan on behalf of someone can be a risky thing to do. Here are some of the considerations you should make, whether you’re the person who needs the loan or the person who will be taking out the loan on behalf of someone else.
What Happens if You Fall Out?
Let’s say you’re the person who has taken the loan out on behalf of someone else, and you then fall out with $10,000 remaining on the loan balance. Unless the other person continues to honour the repayments, you’re going to end up liable for this $10,000 yourself. Unfortunately, you can’t call up the loan company and say “Actually, I took this loan out for someone else,” for them to turn around and say “Thanks for letting us know, don’t worry about it!”
One way to avoid this happening is to have a contract written up for the loan repayments, in effect saying that you have given a loan to the other person, so at least you have some form of legal option should you fall out later. Admittedly, asking someone to sign a contract like this isn’t easy, as straight away they might think you don’t trust them.
What Happens if They Can’t Pay?
Same scenario, but you haven’t fallen out this time. Instead, the person who needed the money has lost their job or ended up taking a pay cut, and now they can’t afford to repay the loan.
Again, the onus falls on you to repay the loan.
The Effect on Your Credit File
If something has a negative effect on your credit file, it has the potential to have a hugely negative effect on your life in general.
How will taking out a personal loan on behalf of someone else effect your credit file?
- If you fall out and stop paying, or they can’t pay, you will be the one who gets the late payment notices, defaults, and potentially the even more serious credit infringement notices on your credit file as a result. The only way you can avoid this is to pay the loan repayments yourself.
- If the person you have taken the loan out for keeps paying you late and you’re reliant on this money to make the payment yourself, the late payment notices alone will affect you.
- Even if you make all payments on time and you never have any problems regarding this particular loan, even having it on your credit file can cause problems. Other lenders will look at your credit file the next time you apply for a loan for yourself, and see that you have this extra $10,000 exposure to debt. Dependent on your income, this could make you a significant risk to the lender, and could be the difference between them accepting or declining your application. Again, you won’t be able to explain that $10,000 of your outstanding debt commitments is actually down to having borrowed for someone else!
Think Carefully Before You Do This
While it isn’t against the law to take out a personal loan on behalf of someone else, you really need to think carefully before you do it. While it feels great to help someone out, in the long term it could lead to serious problems for all parties.
If you need a personal loan but can’t get one, remember that at MacCredit we accept joint loan applications, so if you’re a couple you can apply together rather than have one of you take out a loan on behalf of the other.
Disclaimer: This article contains general comments and recommendations only. This article has been prepared without taking account of your objectives, financial situation or needs. Before taking any action you should consider the appropriateness of the comments made in the article, having regard to your objectives, financial situation and needs. If this article relates to the acquisition, or possible acquisition, of a particular credit product you should obtain and consider the relevant disclosure documents before applying for the product.