Can You Pay Off Someone Else’s Loan?

Paying off another person’s loan can be a valuable way to provide financial assistance. While seemingly straightforward, it involves specific considerations and procedures to ensure the payment is properly applied and to understand related obligations.

General Permissibility and Methods

Most financial institutions permit a third party to make payments towards another individual’s loan. However, some lenders have specific rules or require particular procedures for accepting payments from someone other than the borrower. For instance, mortgage companies may require a formal authorization form from the borrower before discussing account details or accepting payments from a third party.

There are two primary ways a third party can contribute to or pay off someone else’s debt. The first involves the payer sending funds directly to the loan servicer or lender, ensuring the money goes directly to reducing the loan balance. Alternatively, the payer can provide funds to the borrower, who then uses that money to make the payment themselves. This indirect method gives the borrower control over the transaction. These approaches apply across various loan types, including student loans, auto loans, personal loans, mortgages, and credit card debt.

Tax Considerations for the Payer and Borrower

When an individual pays off another person’s loan, the Internal Revenue Service (IRS) considers it a gift from the payer to the borrower. The payer is responsible for any gift tax implications, not the recipient. For the 2025 tax year, an individual can gift up to $19,000 per recipient without gift tax implications or reporting requirements. Married couples can combine their annual exclusions, allowing them to gift up to $38,000 per recipient in 2025 without triggering these requirements.

If a gift exceeds this annual exclusion amount, the excess reduces the giver’s lifetime gift tax exemption. For 2025, the lifetime gift and estate tax exemption is $13.99 million per individual, meaning a person can make substantial gifts throughout their life or at death without incurring federal gift or estate tax. If the amount gifted in a year to any one person surpasses the annual exclusion, the giver must report the gift to the IRS by filing Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return. Filing Form 709 tracks the portion of the lifetime exemption being used, but an actual gift tax payment is only required if total lifetime gifts exceed the cumulative lifetime exemption. A payment made on a borrower’s behalf as a gift is not considered taxable income for the borrower.

Information and Preparation for Direct Payment

Before making a direct payment to a lender, the payer needs to gather specific information. Obtain the full loan account number and the exact name of the loan holder or borrower. Also obtain the lender’s name and contact information.

Secure an official payoff quote from the lender, which provides the current outstanding balance and includes per-diem interest, ensuring the payment fully satisfies the debt. Lenders often require the borrower’s authorization to release such information or to accept a third-party payment. Communication with the borrower is essential to obtain necessary details and confirm their consent. Contacting the lender directly, or having the borrower do so, helps clarify their specific procedures for third-party payments and to obtain the precise payoff amount.

Executing the Payment

Once information is gathered and consent obtained, the payment can be executed through various methods. Many lenders offer online portals that allow third-party payments, or payments can be made over the phone using the lender’s automated system or by speaking with a representative. Payments can also be sent via mail using a certified check or money order, ensuring the correct mailing address is used and the loan account is clearly identified. Some lenders also accept bank wire transfers, for which they provide specific instructions.

During the payment process, ensure the correct loan account number is referenced to prevent misapplication of funds. The payment amount should precisely match the official payoff quote to fully satisfy the loan. After the payment is made, obtain a confirmation number or receipt. Monitor the loan account to ensure the payment is correctly applied and the balance is zeroed out. Finally, confirm with the borrower that they have received a loan payoff statement or confirmation from the lender, and retain all payment records for personal and tax purposes.