Think twice before you co-sign a loan

By Peter Kamuri

It is on a Monday morning and you have just reported for work. Before you settle down, a colleague approaches you flashing some papers. Before you even have a keen look at them, he is on his knees, literally, passionately asking you to guarantee him in a loan he is about to apply for from his cooperative Sacco.

As you try to probe why he needs the money, he gets the better of you and fervently requests you to sign the form without inhibitions. Convinced that he is a colleague and after all you have known him for a long time, you oblige and cosign on the loan application form.

Such a story is familiar to most of us. We often cosign on loan applications forms for friends and colleagues, but we hardly ponder the implications of our actions. In case they default in repaying, we are committing to pay up on their behalf.

Two years ago, James Kinyanjui, a high school teacher made a terrible mistake that he will live to remember for a long time. He guaranteed a colleague a loan he was securing with a cooperative society, but after just making three months payments, he absconded.

Consequences

Kinyanjui laments, “I remember very well how he approached me. He told me he wanted some money to enable him to pay for his children school fees. I did not see any reason why I should not have cosigned on his loan form. After all he was a friend and I had known him for several years.”

“However, after he got the money, it was not long before I got communication from the lender saying that he had defaulted. His shares were attached and I was made to pay the balance from my salary. He has since declined to refund the money,” laments Kinyanjui.

Erastus Aroka, a financial advisor warns, “Most of your friends will often come to you asking you to do them a favour and cosign on a loan they are applying for. However, before you commit yourself into signing, you need to look at the possible consequences of your actions.”

He observes, “Seemingly, many people are not aware of the responsibility of the person who guarantees a loan. You must be aware that when you cosign on a loan, you are making a commitment that in case the borrower fails to repay the loan, you will do it.”

He adds, “When you guarantee someone else’s loan, you are indirectly promising to pay up the loan if he defaults. You are legally liable to pay off the debt if they are unable to pay it off themselves.”

“It is not wrong to help someone get credit as it can help them get out of a problem. However, it is important to know that in case the borrower absconds in making payments, the creditor can come after you to recover his money,” advises Aroka.

“Before you commit yourself, the first thing you should do is to ensure that you can trust the borrower. Have you ever guaranteed him another loan previously? Did he repay his loan on time?” he says.  Aroka further adds, “You can probe the borrower by trying to establish whether he is likely to honour his obligation. Do you think he or she will make timely payments? Is the borrower experiencing financial difficulties that makes him a top candidate for defaulting?”

Big commitment

“You may try to reach out to people who know the borrower to get his credit history. This way, you will be able to know whether he is good at repaying his loans or if he is likely to be problematic,” advises Aroka.

One reason that makes friends and even colleagues to fall out is when one declines to repay loans that have been guaranteed by others. Before you guarantee somebody’s loan, look deeply if this can hurt your future relationship.

“There are those friends whom you may not want to lose. However, when they default in paying a loan you have guaranteed them, this can be a sure way of losing them. It can be very nagging when you will have to constantly remind a borrower to fulfill their obligation,” notes Aroka.

When you agree to guarantee someone else’s loan, you must always remember that you are making a big commitment. Otherwise if he gets stuck in repaying the loan, you must be prepared to shoulder the consequences.

“Do not forget that a borrower who fails to pay off his debt can easily dent your credit history. If you happen to be late in repaying a loan, that was not yours in the first place, you can get a negative credit report that can affect your future borrowing,” concludes Aroka. There is need to first review how well you know the borrower. Why does he need the money? Does the project look viable? Are there other alternative sources that he can explore? How can you rate the borrower’s credit history? And when you guarantee a loan, request the lender to notify you immediately there is default.

Glance

 “Most of your friends will come to you asking to cosign on a loan they are applying. Before you commit yourself, you need to look at the possible consequences of your actions.”

— Erastus Aroka, financial advisor