Be cautious when guaranteeing loans – BoG warns

In a move aimed at protecting consumers and ensuring awareness of the potential legal and financial consequences from acting as a loan guarantor, the Bank of Ghana has issued a stern advisory.

The central bank is urging individuals to exercise caution and thoroughly assess the financial capabilities of borrowers before agreeing to guarantee any credit facility or loan.

A loan guarantor is someone who agrees to take on the legal and financial responsibility of repaying a borrower’s debt if the borrower defaults on their loan obligations. The guarantor becomes liable for the outstanding loan balance, including accrued interest, should the borrower fail to meet loan obligations. This practice is common in many lending scenarios, particularly among friends and family. However, the Bank of Ghana is emphasising the need for consumers to be vigilant in their role as guarantors.

The central bank’s advisory comes as a response to concerns about the potential legal and financial risks guarantors may face. In a notice, the banking industry regulator has outlined key points consumers should consider before agreeing to guarantee a loan.

“Assess the borrower’s repayment capabilities before guaranteeing any credit facility or loan. Don’t forget that, as a guarantor, you will be required to pay back any outstanding loan balance if the borrower is unable to meet their loan obligation,” the Bank stated.

The central bank also warns against rushing into guaranteeing loans and signing related documents without careful consideration. Instead, it strongly advises potential guarantors to obtain a copy of the loan agreement and thoroughly study its terms and conditions. Understanding the legal obligations and financial implications of guaranteeing a loan is paramount in making an informed decision.

“Do not rush to guarantee for borrowers and sign off on the documents. Obtain and study the loan agreement to ensure that you understand the terms and conditions, and you are comfortable, before committing yourself,” the advisory states.

One crucial factor highlighted by the Bank of Ghana is the potential pitfalls of depending solely on the borrower’s word of mouth or strength of a personal relationship when agreeing to guarantee their loan. The central bank makes it clear that, as a guarantor, it is the individual’s duty to conduct due diligence and make an informed decision.

“It is your duty to do due diligence. Remember, the commitment has legal implications,” the advisory adds.

Furthermore, the central bank has urged consumers to exercise caution and seek professional advice if they have any doubts or concerns about the loan guarantee they are being asked to provide.

“If in doubt, seek independent legal and financial advice prior to accepting to guarantee a loan,” the Bank of Ghana counselled.

The advisory is significant in the context of Ghana’s lending practices, where it is common for individuals to request friends or family members to act as loan guarantors. In many cases these guarantees are based on personal relationships and trust, with little consideration of potential legal and financial ramifications.

The Bank of Ghana’s warning aims to raise awareness among consumers about their rights and responsibilities as guarantors, and to ensure they make well-informed decisions. This advisory is a proactive step toward reducing the risks associated with loan guarantees, which can sometimes lead to financial strain and legal complications for individuals.