Ten Commandments of Financial Wisdom #8 – Thou Shalt Not Be Surety for Others

While I was at secondary school, I had the pleasure of studying Shakespeare’s famous play, The Merchant of Venice. Spoilers ahead if you haven’t read it but the summary is Bassanio, a poor nobleman in Venice, needs money to woo the beautiful heiress, Portia. He asks his friend Antonio for a loan, but Antonio has invested his funds in ships overseas. The moneylender, Shylock, offers the cash on the condition that he will take a pound of Antonio’s flesh (!) if the loan is not repaid within three months. Antonio goes bankrupt and is in very real danger of being mutilated in court until Portia steps in, disguised as a young male lawyer, to save the day.

This story had a happy ending, but in real life suretyship can have devastating consequences. Maybe not as physically gruesome as Antonio’s potential fate but emotionally and physically, it really can be terrible.

Please forgive my Old King James version English use of the word ‘surety’. Surety involves a promise by one party to assume responsibility for the debt obligation of a borrower if that borrower is unable to pay. Today, we might be more familiar with the term ‘co-signing a loan’ which is basically the same thing. Originally, I wasn’t going to include surety in my Ten Commandments as I wasn’t sure how relevant it is now, however it kept coming up in my study of Proverbs leading me to believe this is still an important issue today.

The Bible is very clear that 99% of the time, being surety or co-signing a loan is a big no-no. Proverbs 6: 1-5 says:

My son, if you have put up security for your neighbor,
    have given your pledge for a stranger,
² if you are snared in the words of your mouth,
    caught in the words of your mouth,
³ then do this, my son, and save yourself,
    for you have come into the hand of your neighbor:
    go, hasten,^[a] and plead urgently with your neighbor.
⁴ Give your eyes no sleep
    and your eyelids no slumber;
⁵ save yourself like a gazelle from the hand of the hunter,^[b]
    like a bird from the hand of the fowler.

The above literally says that if you have got yourself into this situation, you must not sleep until you have freed yourself! You are exposed and vulnerable like prey being stalked by a hunter. Not an ideal situation to be in.

So, what does surety look like today? It is possible to co-sign loans with companies such as Amigo loans. If such a service exists today in the highly regulated world of financial services, then it must be OK right? What can a dusty old book written thousands of years ago tell us about financial prudence? Well let’s take a closer look at Amigo loans.

Amigo loans provides guarantor loans, where a friend or family member guarantees repayments, and they are often taken out by people who might otherwise struggle to borrow (First red flag).  It is possible to borrow up to £10,000 at the extortionate rate of 49.9% (Serious alarm bells now). In May, Amigo loans told a court hearing that they were in danger of bankruptcy as a result the huge sums of compensation they are obliged to pay, as a result of the vast numbers of complaints against them (Houston, we have a problem).

According to the latest data from the UK’s Financial Ombudsman Service, guarantor loans were the most complained-about product during the three months from 1 October to 31 December 2020. Complaints range from borrowers saying the lender should not have given them the loan because they could not afford it, to friends and family members claiming they did not agree to be a guarantor or were pressured into doing so. The sharp increase meant that for the first time in 13 years, payment protection insurance (PPI) was not the most complained-about financial product.

In light of the evidence above, I rest my case. In Proverbs 11: 15 (ESV) it simply says:

Whoever puts up security for a stranger will surely suffer harm,
    but he who hates striking hands in pledge is secure.

As the vast number of complaints show, a lot of people have suffered harm. However, what these statistics don’t show is the friendships that have been destroyed or families broken as a result of this financial arrangement going pear shaped.

However, as with most rules there are certain exceptions. The BOMAD (Bank of Mum and Dad) is one. Mummy and Daddy were guarantors for my rented accommodation at University and I’m sure many others have been in the same situation. Aside from this, if you really want to help someone by co-signing a loan, two conditions must exist to even consider it:

• You know the individual very well and they are a person of good character
• You can comfortably afford the debt if the person can’t pay

Even if these two conditions are satisfied, you should still proceed with caution and walk away completely if your gut says no.

In finance and life in general, there will always be risk. It can never be completely eliminated but it can be reduced to a certain extent by being wise and cautious in your dealings. Why would you risk financial exposure by guaranteeing the performance of someone whose lack of creditworthiness requires you to co-sign? Friends, let us not be hasty or foolish in our financial decisions to reduce the likelihood of pain and regret in the future.

God bless

Ten Talents