We have noticed that our clients raise this subject more and more often. They have taken out a loan or a clothing account on behalf of a friend or family member, but as of late the borrower is unable to make payment when it is due and this has led to the client’s over-indebtedness, and now creditors are harassing them. You need to be very cautious before you enter into these agreements as the consequences could be devastating to not only your relationship, but to you too.
The most important rule to consider, which is often overlooked, is that there are no guarantees that your current relationship with the borrower will remain the same forever, or at least until the loan is repaid.
The warm fuzzy feeling you are feeling for your loved one today, might not be the same in a couple of months or years. The loving feeling might be exchanged with anger and animosity in the near future.
Legally, you are responsible for the repayment of the debt. You signed the agreement, so you are liable to repay it to the creditor. Whether or not the borrower has paid you the instalment, the creditor will expect the payment to be made.
Should you default on the agreement the credit provider will institute legal action against you, meaning that you and your credit record is at great risk. The default will appear on your credit record and so influence your credit score and ability to apply for credit in future. Should the default not be rectified timeously, the legal action will be issued in your name and judgement will be granted against you. You will also be liable for these legal costs.
If you are still not be convinced not to proceed not to borrow money on behalf of others, be sure to have a legally binding agreement, signed by both parties, also known as an Acknowledgement of Debt. When drafting such an agreement, be sure to consider all worst case scenarios. Be sure to consider the following topics when drafting the agreement:
- Exact payment dates,
- Methods of payment,
- Banking details of deposits
- Instalment amounts,
- Consequences of default payments and additional interest and fees;
- Your rights regarding legal action against the debtor.
It is beneficial to set up a debit order on the debtor’s account to make payment on a specific date, usually payday, to mitigate some of your risk. Please note that this is not a guarantee that you will receive payment, as there has to sufficient funds available in the account for the debit order to be paid.