Is someone you know request you to be a co-borrower or guarantee a loan for them? Do not jump quickly on saying “Yes”. Analyze first what it means and how it is done. What is the definition of a co-borrower?  It is an extra borrower who materializes on paper with his or her income and credits analyzed if they can also meet the criteria in qualifying for a loan. If an agreement has been made by both the co-borrower and borrowers, they would be held responsible and accountable in repaying the loan. In case the borrower was not able to fulfill all of their obligations, you the co-borrower would shoulder the outstanding balance. If you’re being made a as guarantor, it means that you are officially answerable for paying back the entire and total loan if the borrower cannot or will not make the repayments.

Of course if someone you know especially if it’s your friend or a family that is experiencing financial difficulties, you want to be of help for them. What should you do? You have to carefully make the decisions for it would likely to affect your relationship afterwards. You have to think and mull over certain important factors like if worst comes to worst, can you and are you willing to pay the debt? This would also risk your finances thus you have to assess and carefully plan your next steps.

After weighing the pros and cons, and you’ve decided to offer yourself as a guarantor or co-borrower, you have to interview the person you’re about to lend. Ask why and where they would use the money for. Sometimes, when it’s used for luxurious purchases and extravagant holiday trips abroad, you might want to hold back and analyze if it’s really the best option of lending him/her the precious and hard earned money you have only to be used for not so important matters. Assess the capacity of the person if they can repay the amount. Do they have any jobs or other payment methods that can help them to regularly pay you in terms of your agreed amount and time?

Once all terms have been laid and discussed thoroughly, draft an agreement which comprises all the conditions of the loan. State the amount of the loan to be given, how much the interest rate would be, and you can also include if you would add fees and charges. You can also discuss if they want any collateral if incase you would be forced to pay all of the debts and loans. Create also the length of payment and how the payment would be made, is it monthly or every 2 months depending on your agreement. It is recommended that you create a promissory note, if in case any legalities or the borrower left you, you won’t end up losing not only your trusted person but also your money. Create a promissory note stating all legal affairs and have your note notarized before you bestow the allotted cash. You can also lookout and recommend other financial if incase you wouldn’t be able to offer a loan:

Loaning your relatives or friends, is that a good Idea?