Why blindly guaranteeing a personal loan could land you in trouble with the banks

Most of us have been approached at one time or the other in our lives by close friends or family seeking support in the form of signing personal loan forms as a kind of guarantee that the person getting the loan will clear their loan obligations on time and that if they fail the bank can in essence legally force us to clear the outstanding portion of the loan.

What we often do not realize is the fact that this act of kindness if done without due diligence can come back later to haunt us. Most of us take financial matters casually and tend to believe our own common sense judgments will see us through. It is important to understand the fact that before signing as a loan guarantor one must know facts about the loans terms and conditions such as amounts to be repaid and duration of loan amount.

In the event that person taking the loan fails to pay what is the worst that could happen Almost all loan guarantors do not

Firstly have you understood what the banks terms of the loans are?

Do not make the mistake of assuming that the loans terms will always remain the same, banks have a tendency to hide their interest rates in fine print with ambiguous language for example they may say that a particular loan will carry an interest of 13%, this may mean 13%per month or per year the two values translate into substantial figures that will affect repayments, so study the loan contract it may be full of landmines that will blow you up the moment you sign as a guarantor.

Does the person taking the loan have a stable consistent income?

This is important because repayment of the loan will be from the income of the person, the issue about future consistency is also important banks take the risk to award loans to individuals after assessing the income of the person, sometimes what happens is the applicant does not disclose certain facts that may threaten his future ability to earn, such facts may include but are not limited to displinary record at place of work, presence of other informal loans that the applicant has to service, number of dependents not declared etc all these will affect the income available to service a loan.

Demand confidentiality from those you help to guarantee

Your decision to help someone should remain a secret and insist that those you help guarantee maintain confidentiality, the reason I say this is once you help one person get approved for a loan they will often let others needing the same help know that you helped them and this makes it a little harder for you to turn down future requests which may come from people much closer to you. Do you know the reason for the loan request? Many times one will come with genuine reasons for wanting a loan; these may include expanding a business, orstarting a new business venture while these can be impressive ideas on paper often the people taking up the loan have no accounting knowledge or thorough research of the projects they intend to carryout, many are just “copy and paste’’ type of businesses in the hope that somehow they will succeed, even with a genuine reason given it is still not prudent to guarantee such a loan applicant although the risk is much lower than a person that just gets a loan to spend on luxury items.

Does the person have a history of successful loan repayments?

If one has been able to clear their previous loan obligations then it is likely that their business ventures or reasons for getting loans are clearly well thought out and are profitable, such a person keeping all factors constant is more likely to service his future loans to completion without having to drag you into the mess of clearing a loan whose owner fails to live up his or her debt obligation. Is your own income stable for the foreseeable future? This is important in the event that the person you have guaranteed a loan for fails to pay are you able to pay off the outstanding debt, if the answer is no then politely turn down the request. Even though turning down this request may make you nervous it is better to calmly explain that you will not be in position to guarantee the loan because your future income will be tied to other projects or may not be stable and consistent.

Demand full accountability and loan status updates from the loan beneficiary

In the event that you decide to guarantee a loan for someone having considered all the factors above one final point not to ignore is the need to keep updated on the loan repayments as they take place,the reason i say this is most people assume that the role of a loan guarantor ends after the person gets the loan money which is not the case remember at his point you are at risk from facing the consequences of a loan default, ensure you get timely updates in the form of official bank statements that will show the loan repayment status, any changes to the loan agreement should also be notified to you in writing so that you are able to evaluate your current status as a loan guarantor.


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