In Proverbs, the Good Book warns us against guaranteeing a loan if we are not ready to face the tough consequences that may arise when the chips are down. Thousands of years after that admonition was given, it is interestingly still relevant today. Agreeing to guarantee a loan is certainly a great risk, one that if to be taken at all but be done after taking some important precautions.
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To be candid, one of the best things one can ever do is to outrightly refuse to guarantee loans but the truth is that by so doing you could end up hurting those who are dear to you. So, if you must agree to guarantee a loan for whatever reason, here are top three things that you must not take for granted.
1. Your Readiness To Pay Back If The Applicant Defaults
The worst thing that can ever happen to a loan contract is the inability of the borrower to either temporarily or permanently pay back. Nothing more, nothing less. So, before you guarantee a loan you need to ask yourself whether you are actually ready to pay back in the event that the borrower is unable to pay back.
If your answer to the question above is an emphatic no, then you are better off refusing to guarantee the loan. It is better you stand your ground than to stand on the ground of embarrassment.
2. The Borrower's Willingness And Capacity To Pay Back
In this regard, it is necessary that you independently assess the willingness (character) of the applicant and his or her capacity to pay back. Have you had any financial dealing with the applicant in the past? If yes, can you vouch for the character of the applicant? If yes, then you are not likely to have a problem until you also look at the applicant's capacity to pay back.
Having a good character is good, but having the capacity to repay the loan is even more important. This is because character is not a cheque, capacity is. You must be able to independently estimate the net worth of the applicant and be rest assured that it is more than sufficient to bear the liabilities that will arise from the loan.
3. The Applicant's Investment Plan
Finally, before you decide to become the guarantor to a loan, you should also look at the viability of the applicant's investment plan and the possible risks associated with it. If you guarantee a loan that ended up being invested in a meaningless venture or entirely diverted into a white elephant project, then you will be left with no option than to face the music when the lender starts coming after you.
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