Can You Take Out a Personal Loan for Someone Else?
Considering a personal loan for another? Understand your financial responsibilities, potential risks, and strategies to protect your credit and assets.
It is possible to obtain a personal loan where the funds are intended for another individual. The person whose name appears on the loan documents, rather than the ultimate recipient, bears the primary legal and financial responsibility. While this can provide financial assistance, it involves understanding the commitments and potential impacts on the borrower.
Methods for Lending to Another Person
An individual can facilitate a loan for someone else through several methods, each defining the borrower’s relationship with the lender. One approach involves taking out a personal loan solely in your name. You apply for and receive the loan based on your creditworthiness. The lender views you as the sole borrower and expects repayment from you, regardless of any informal agreements with the recipient.
Another method is co-signing a loan. When you co-sign, you agree to be equally responsible for the debt if the primary borrower fails to make payments. The lender considers both your credit history and income when evaluating the application. This arrangement provides the lender recourse against both parties.
Applying for a joint loan presents a third option. With a joint loan, two or more individuals apply together, establishing equal responsibility for its repayment from the outset. Unlike co-signing, all parties to a joint loan share direct and equal liability for the debt from the moment the loan is disbursed. Each method has distinct implications for the borrower’s legal obligation.
Implications for the Primary Borrower
Taking out a personal loan or co-signing for another person has direct financial consequences for the individual whose name is on the loan. A new loan, whether sole, co-signed, or joint, introduces new debt, which can initially affect your credit score. Lenders perform a “hard inquiry” on your credit report when you apply, potentially causing a temporary dip in your score. The loan also increases your total debt load, impacting the “amounts owed” category in credit scoring models.
Your payment history on this loan determines its long-term effect on your credit. Consistently making timely payments can build a positive credit history and improve your score. Conversely, missed or late payments can severely damage your credit score, potentially remaining on your report for up to seven years. The lender will pursue the individual(s) named on the loan for repayment, irrespective of any private agreements.
This new debt also influences your future borrowing capacity. Lenders assess your debt-to-income (DTI) ratio, comparing your total monthly debt payments to your gross monthly income. A higher DTI ratio indicates a larger portion of your income is allocated to debt, potentially making lenders less willing to approve future loans or offer less favorable terms. Maintaining a lower DTI ratio, generally below 36%, is preferred by lenders.
Safeguarding Your Financial Interests
When taking on financial responsibility for another person’s loan, formalizing the agreement between individuals is important. A written promissory note between the borrower and the recipient outlines the terms of repayment and clarifies expectations. This document should specify the principal amount, any agreed-upon interest rate, and a repayment schedule, including due dates and payment amounts. It should also include provisions for late payments or default, stating the consequences if the recipient fails to adhere to the terms.
Understanding potential tax implications is also important. If the money transferred exceeds the annual gift tax exclusion limit, the giver may need to report it to the Internal Revenue Service (IRS). For 2025, the annual gift tax exclusion is $19,000 per recipient. Gifts exceeding this amount are applied against the giver’s lifetime gift and estate tax exemption, which is $13.99 million per individual for 2025. While most people will not owe gift tax due to the large lifetime exemption, a Form 709 must be filed if the annual exclusion is surpassed.
Maintaining open communication and establishing clear boundaries throughout the loan’s duration can help preserve the relationship and financial well-being. Regular discussions about repayment progress, financial challenges, and the potential impact on your personal finances are advisable. Proactive communication helps manage expectations and address issues before they escalate.