He was then reminded by the loan company that he endorsed the loan agreement as a guarantor and provided all supporting documents including his cheques.
Most non-traditional online fintech lenders do not request physical collateral from potential borrowers but demand guarantors who will underwrite loan sums, consequently accepting ‘some’ liability on behalf of the borrower. If you are approached to be a guarantor, would you do it?
To make an informed decision, it is critical to understand the need (when required and why) for a guarantor and the attendant implications.
In my prior experience as a banker and the founder of a fintech company focused on SME lending, I have seen a couple of scenarios play out in lender-borrower-guarantor relationships. Lady A recently visited my office in tears. She had guaranteed a 5 million business loan and the borrower had been defaulting in the repayment of its obligation. All Lady A’s efforts to ensure the borrower paid the debt were futile. In fact, the borrower blocked her from all possible communication channels – phone calls, text messages, WhatsApp, social media, and so on. A mind-boggling and unfortunate reality! In this case, the borrower abandoned the guarantor to pay up the debt.
Another person shared an experience where she guaranteed a colleague’s loan as far back as 2003. She had to pay N1.5million to prevent formal complaints being forwarded to her employer. Banks do not take staff indebtedness lightly and this could have made her lose her job. She coughed up the money, despite being an entry-level staff earning about N80,000. She thought she was helping a friend. Money does indeed reveal the true character of a person.
Some others have said they must know the person well enough and they never guarantee more than sums they are able to pay back themselves.
Loan companies typically request for guarantors when loan amounts are high – they do not demand physical collateral such as landed properties, cars, etc. This is the reason loans from online lenders are processed much quicker than most traditional banks. Guarantors are required to mitigate the risks of defaulting.
A guarantor is someone that signs an undertaking that, in the event the borrower defaults, s/he would pay the outstanding loan sum on behalf of the borrower. A guarantor is most times bound by the same terms and conditions that apply to the borrower. The guarantor is usually required to show proof of creditworthiness and financial capacity to repay the loan if the borrower defaults. This means that a guarantor must have the same ability to repay the loan just as the borrower and will step into the borrower’s shoes in the case of default.
In other words, where a borrower fails to repay a loan fully or partly, the guarantor automatically must step in to settle the outstanding debt. It is important to note that there is a difference between referencing and guaranteeing a loan. In this context, referencing is simply validating the identity of a person and this is usually requested when an individual or a business needs to open a current account with a bank.
To be a guarantor, you are typically required to co-endorse a tripartite agreement with the borrower and lender, fill a guarantor’s form, provide a copy of your ID card, a proof that you can repay the loan if the borrower fails and so on. You must satisfy all the criteria like you are a borrower, which includes issuing cheques (in favour of the lender) in accordance with the repayment schedule set for the borrower.
What then are the implications of standing as a guarantor on behalf of a business or an individual?
Primarily, you have also become a debtor and this may affect your own ability to borrow in the future. This is because when you apply for a loan, your obligations would be considered in assessing how much head-room you have. If, for example, you are qualified for N5m and you are a guarantor to the tune of N2m, all you will have access to borrow is N3m. If you are eligible for N5m and you guaranteed the same amount, you won’t ordinarily be granted a loan. However, with pending improvements with the credit system in Nigeria, you may be able to wriggle through and still get some sort of funding.
A second consequence is that information on all direct or indirect loans are sent to the Credit Bureau and these are captured in individual credit reports with scores awarded. Surprising? Yes, we have credit scores in Nigeria that indicate a borrower’s status as excellent, good, fair or poor. Loan companies use this in assessing credit behaviour. In countries with robust credit systems, poor credit report scores invariably reduce the likelihood of being granted a loan.
Lastly, there are chances that the borrower may default. This is a nightmare you want to avoid at all costs because if this happens, the burden of the unsettled obligation falls on you. To repay this loan, you may even have to take a loan.
Asides the strength of the Nigerian credit system, you need to safeguard your credit score. Apart from lenders, other companies in the telecoms and power sectors also feed data into the Credit Bureau’s database and these pieces of information are used in determining credit scores. Credit scores or history from Nigeria can also now be used in countries like Canada and the USA to access credit opportunities previously unavailable because of lack of credit history in those countries.
In conclusion, you should be a guarantor when it is absolutely necessary and the borrower is trustworthy. People with negative experiences have said they would only do this for immediate family members or close friends. Apart from family, I have gone a step further to guarantee a senior colleague (this was years back) and she paid up. She was a trustworthy person.
Given what you now know, if someone approaches you to stand as a guarantor, will you? If yes, under what circumstances? Must the person be your family, close friend or colleague? Why?
Kindly share experiences on loans you – or someone you know – guaranteed and how things panned out? What will you do differently?