Loan Securities-Guarantors, Part 2

In our last article, we looked at who qualifies to be a loan guarantor and the benefits of using guarantors as a form of loan security. That said and done, what should one consider before committing guarantee a loan?

Before agreeing to be a guarantor, individuals should consider a host of factors to protect themselves from being negatively impacted by a seemingly good deed. These include;

How well you know the borrower: Do you know the loanee in person? What does he/she do for a living? Where does he/she reside? What is his/her character? You should be in a position to answer a number of questions about the borrower at the top of your head.

Your finances: A close and honest examination of your finances should be conducted before you even consider becoming someone’s guarantor on a loan application. Can you afford to be burdened with someone else’s debts if the applicant does not meet his or her obligations?

Borrower’s personal finances: A person who asks you to be a guarantor should be ready and willing to grant you access to their personal finances before you make your decision. This includes a current copy of his or her credit reports and current bank statements, as well as a list of his or her monthly expenditures, including rent, utilities, food, etc. You can then do the math yourself to determine if the person is capable of making the monthly payments on a loan or if the loan will be stretching finances too thin.

Loan terms: Prospective guarantors should also get terms of the potential loan in writing before making their decisions. Before appending your signature, go through the application form to understand loan purpose, duration, charges and any other terms attached to the credit.

Your burden proportion: Most often than not, financial institutions ask for at least two guarantors. It is important to understand how many other guarantors the loanee has and how much of the total loan you are guaranteeing. For instance, if the total loan is Ksh. 1,000,000 and you are three guarantors, your burden share could be 40%:30%:30%. The loan burden is either shared equally or each guarantor takes an agreed share.

Reasons for rejection: Lending institutions have various reasons for denying a loan application, and not all of those reasons should concern a potential guarantor. For example, young people without a significant credit history may find it difficult to secure a loan with a reasonable interest rate. In those instances, young people may ask parents or friends with good credit to guarantee their loan so they can get a lower interest rate and a more affordable monthly payment.

If a short or non-existent credit history is the only reason a person who can otherwise afford a loan asks you to be a guarantor, then that should make you more comfortable guaranteeing his or her loan.

But someone asking you to be a guarantor on a loan application because their credit history is poor should raise a red flag.

What do you risk: What have you attached as security? At times it may be shares or deposits with the financial institution, collateral etc.

The National Assembly’s Justice and Legal Affairs Committee approved a bill seeking to amend the Law of Contract Act in order to provide legal protection to guarantors whenever commercial banks and lenders are pursuing a principal borrower. The proposal to amend the law to require lenders to first seize all the assets of a borrower before going after those of guarantors.

However, even with the bill, guarantors ought to carry out due diligence so that they have a thorough knowledge of what they are signing up for.

Parting shot; No man is an island, today someone approaches you to guarantee them to take a loan, tomorrow you are likely to ask them for the same favour. So it is wise to guarantee loans as long as the above factors are considered.

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