Loan Securities-Guarantors, Part 1

Among the requirements for loan approval, security provision form one of the critical requirements. Security creates some degree of comfort to any financial institution that the credit advancement is safe in the event of unforeseen occurrence in future that may lead to loan default.

As a standard procedure, a financial institution shall often request for security when advancing a loan to its clients

There are mainly two major categories of loan securities;

Non-conventional (Personal Security)

  1. Guarantors
  2. Chattels

Conventional (Non-Personal security)

  1. Title Deeds
  2. Cash covers
  • Logbooks
  1. Shares in Nairobi Securities Exchange

To guide this discussion, we crosscheck the details on each one of them;


A guarantor?

Who is a guarantor?

This is both a physical and legal person who gives an assurance that the borrower shall meet his/her responsibility of loan repayment. It goes further to be interpreted to mean that the said guarantor purposes to pay should the borrower fail to honour his debt responsibility.

Any time a loan facility is taken, the primary responsibility to pay loan lies with the borrower. Financial institutions however at times require people to guarantee for the loan as proof of character on the part of the borrower, to confirm details provided by the borrower, for ease of follow up in case of default and to take up the responsibility where the borrower fails to live up to the loan’s terms and conditions

Agreeing to be someone’s guarantor on a loan is a selfless act. Men and women might seek a guarantor because their credit histories are short or nonexistent or because lending institutions view them as too risky.

Who qualifies to be a guarantor?

  1. The guarantor is expected to have a good credit history and sufficient income to cover the loan payments if the need arises. Once a guarantor enters an agreement, the contract will remain binding until the end of the repayment period.
  2. A guarantor is also someone that certifies the true likeness of an individual applying for a product or service. A guarantor is also known as a surety.

Financial institutions may include more requirements depending on their policies and procedures as well as the risk involved. These include;

  • Be an active customer or member of the lending institution,
  1. Work in the same company or institution (in case of salary loan),
  2. Hold a certain amount in deposits which shall not be withdrawn until the loan is recovered fully or their obligation ceases.

Benefits of using guarantor (s) include;

  1. Allows access to credit to young professionals and small business people who might not have conventional security like title deeds and logbooks
  2. Saves money and time since there are no costs associated with security perfection.
  • It’s the only form of security which to a good percentage guides the lending institution on the character of the borrower.
  1. Credit risk is minimized especially with the use of correct guarantors.
  2. Promotes social well-being in a society this is especially so in Chama lending
  3. Reduces chances of default due to borrowers accountability to the guarantor (s)

But agreeing to act as a guarantor on a loan application carries a considerable risk that can come back to haunt the guarantor if a borrower fails to meet his/her obligations.

In the event of default, the guarantor’s credit history may be negatively affected, which could limit their chances of getting loans or any type of credit form a lending institution in the future. It is, therefore, imperative that the guarantor understands the responsibilities involved when they sign an agreement.

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