Mr Kola, a banker, an assistant manager approached a financial service provider for a pay day loan of N500,000.00 with the intention to pay in installments over a 3-month period. However, having met all conditions and documentation requirements, and careful review of his salary account statement by the lender, he was asked to provide a guarantor to support his application for possible approval.

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However, Mr Kola was taken aback, as to the reason why a guarantor is required, he reiterated, “I work in a good organization, one of the top 5 in the industry in Nigeria in terms of profitability, stability and staff remuneration, my salary is regular, my employment status is confirmed and permanent, and with my profile I am credit worthy, I like my business to be kept personal”.
I thought for a minute, “he is right after all”, but on further enquiries I understood the reasons for the additional requirement of a guarantor and that has inspired these caption and I will tell you why Mr. Kola was asked to provide a guarantor for his request.
Who is a Loan Guarantor?
A person who guarantees to pay for someone else's debt if he or she should default on a loan obligation - According to Investopedia

A guarantor will pledge their own assets or services as a backup if a situation arises in which the borrower or original debtor is unable to perform their loan obligations.

1. A loan guarantor is anyone who provides guarantee
2. A loan guarantor is not necessarily the borrower, can be a third party
3. A loan guarantor can also be the borrower, if he has assets that can be pledged for liquidation in a case of default.

Factors necessitating a guarantor?
1. Over geared income: statutorily, the central bank prudential guidelines regulates and supports that an individual must not use more than 33% of the net monthly income to service loan obligations, so that the remainder 66% is left to support other domestic and administrative obligations of the borrower as the case may be. When an income is over leveraged, it poses a risk of possible default if an unexpected financial setback is encountered, thereby making it rather difficult for loan obligations to be met.
2. Irregularity of income; your income can be good and substantial to cover the loan repayment obligation, but your employer(s) can be inconsistent with paying your salaries as at when due, thereby creating ambiguity as to the actual pay day for their staff. Though it is not the applicants’ fault, but the lender identifies a risk and wants to be covered in any case of default.
3. Poor or limited credit history; the statement can throw up a lot of details which includes, history of payments, defaults or returned cheques of previous credit facilities from other sources. All this enhances or reduces the credit worthiness of the applicant and the possibility of a repeat of such events.
4. fear that your income may not be high enough to meet your repayments; it is discovered that more often than none, people tend to request for more than what they require anytime the opportunity presents itself. So as a lending institution, where such requests are considered and approved for whatever reasons inspite of the fears of default, the lender can and should ask for a guarantor as a cover for any eventuality.
5. Industry nature: Some industries are known for higher job security than others, while some others are known for their dynamic nature, job insecurities, losses and higher staff attrition rates. Where such threat exists to the primary source of repayment, it become necessary to request a guarantor in additional to the requirements for the loan application.
6. Other risk factors that suggests a possibility of default not mentioned here can also prompt the lender, if it makes them uncomfortable, to ask for a guarantor.

Types of Guarantors?
1. Individuals, can give personal guarantees to other individuals or corporate organizations
2. Corporate organizations can give corporate guarantees to both individuals and corporate entities i.e. employers can guarantee staff loan obligations
3. Banks, that is what is called a Bank Guarantee
What qualifies a loan guarantor?
1. Income - Earning capacity is at same level with the borrower: have history of profits which can be relied on for payment
2. Networth is greater than or at same level with the borrower: have assets which can be sold to help pay back the loan
3. Must be within reach of the lender, either in the same state or country and can be international (i.e. Letters of Credits - international guarantees from importers’ banks to suppliers’ banks abroad)
4. Willingness to pay on default by pledging personal assets i.e. cash or fixed properties, transfer legal documentations and financial instruments to lender to hold in trust.
Mr. Kola though with a good salary, consistent in payments, good credit history, in a fairly stable industry but his salary is highly geared, that is he is already exposed to various loans from other sources and exceeded the statutory requirement of 33% serviceable portion of his income for loans, thereby making him vulnerable to default if any unexpected financial incident occurs that can distort the present cash flow.