Personal loans for loved ones: How one kind gesture can haunt your credit score

When you lend money to a loved one, it can often feel like the right thing to do. But when you take a personal loan in your name to help someone else, the responsibility and the credit impact sit squarely with you. Every repayment you make, miss, or delay is recorded against your credit profile, regardless of who actually uses the money.

Shakti Shekhawat, Business Head, BharatLoan, says, “Short-term borrowing driven by emotion often shapes long-term credit behaviour. Credit systems don’t assess why you borrowed, only how responsibly you managed it. Treating personal loans as planning tools, not emotional decisions, helps protect credit health over time.”

That is why it is prudent to never casually borrow funds and lend them to family members or friends. This is because if the funds are not managed properly and EMI repayment dates are missed, you might even face forced recoveries and serious legal ramifications.

Why lenders only look at you, not intentions

When you borrow or avail any new personal loan, do keep in mind that the lender’s agreement is solely with you. Repayment history, outstanding balance and defaults are linked to your credit report, even if the money was used by someone else, and repayments depend on them.

That is why, don’t be in any doubt that you can claim reprieve in such situations. Even if the issue gets escalated and you are faced with a legal case, you will still be held responsible because the financial institution provided you with the funds, and that is why the liability of meeting repayments lies entirely with you.

How does borrowing affect your credit score

1. The personal loan will increase your overall debt and monthly obligations.
2. Any delayed or missed EMI directly pulls down your credit score.
3. A higher debt load can decrease the likelihood of approval for any future loans.
4. A high debt can also increase your credit utilisation ratio, making your credit profile unhealthy.

What to check before taking a new personal loan

1. Whether your income can manage EMIs without being dependent on others.
2. If you have savings for emergencies, will you be able to make the repayments?
3. How this loan might impact near-term goals, such as buying a house.
4. Are you prepared for any unforeseen event, a medical emergency?

Personal loans also have several potential downsides, such as high interest rates, late payment penalties, and long-term financial strain if circumstances change. Always seek advice from a certified financial planner before taking on debt for someone else. Thoughtful assistance not only safeguards a relationship but also your financial well-being.

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Disclaimer: MintMoney has a tie-up with fintechs for providing credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. MintMoney does not promote or encourage taking credit, as it comes with a set of risks, such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.