Factors You Should Consider Before You Guarantee A Loan
For over four years now, I have worked as a credit analyst in one of the leading financial service firms in the world. In the course of my job, I have seen a number of loan guarantors run into serious trouble when the clients they guaranteed become bankrupt, unable to repay their loans.
When this shit happens, the loan guarantors begin to make silly excuses; excuses like they didn't know that a guarantor was liable if the borrowers are unable to meet up with their loan repayment. Well, ignorance is never an excuse in the court of law. Consequently, I have seen guarantors lose valuable assets to financial institutions because of the terms and conditions in the loan contract they blindly signed.
Don’t agree to guarantee another person’s debt or put up security for someone else.
If you can’t pay it, even your bed will be snatched from under you.
Proverbs 22:26-27
Who is a Guarantor?
A guarantor is a person who agrees to repay the borrower’s debt should the borrower default on agreed repayments.
Source
What Are the Risks Involved When Standing as a Guarantor?
- Liability
You are liable to make payment on behalf of whom you are guaranteeing in the event that he/she defaults.
- Embarrassment
You could be subjected to untold embarrassment by the loan recovery department of the financial institution involved.
- Legal Battle
You may be dragged to court in the event that you are not fulfilling your obligations as a guarantor.
Factors You Must Consider Before Guaranteeing a Loan
- The Integrity of the Borrower
It is very important that you consider the integrity of whom you are guaranteeing. Money changes human behaviour. You must therefore ensure that the borrower has integrity. Unfortunately, there is no scale to measure integrity. Therefore, follow your instincts.
- The Terms and Conditions of the Loan
Every loan has terms and conditions clearly stated in the loan contracts, if any. In most cases, the borrowers are often carried away by the loan disbursement and do not mind the stringent loan terms and conditions. This is why as the guarantor you must determine the conditions, so that you don't run into trouble.
- The Interest Rate
Loan funds are not free. Every loan comes with an interest rate. And interestingly, interest rates varies from one lender to the other. Some interest rates are as high as the orbits. If you guarantee such loans, you would have Shylock to pay when trouble comes.
- Your Readiness and Capability to Pay Back
Yes. You read that right! The most important factor you should consider before you guarantee a loan is whether you are ready and capable of paying back in the event that the borrower becomes indisposed. If your answer is NO, I would strongly advise that you stay away from guaranteeing. The golden rule is, never guarantee a loan you cannot pay back.
- Legal Advice
Finally, I will advise you seek the counsel of your legal adviser before you guarantee. There are some variables you may not perceive as a layman but your legal adviser should be able to give you sound counsel.
Don’t agree to guarantee another person’s debt or put up security for someone else.
If you can’t pay it, even your bed will be snatched from under you.
Proverbs 22:26-27
Good advice. Don't be ashamed to say no even to close relatives and friends. Guaranteeing a loan is great risk because you are not in control of the situation.
That is very right. I have had a lot of terrible experiences and would suggest people look before they leap.
Thanks for stopping by.
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