The Pitfalls of Blind Trust - A Cautionary Tale About Being a Loan Guarantor

In my previous company, we had an employee savings and loan association that helped out members by setting up recurring savings via salary deduction and offered loans with reasonable repayment terms and interest rates (like a credit union). It had a "savings" component with an interest rate not too far from commercial bank rates, and a "capital contribution" component with a monthly cap on how much you can place there. The capital contribution part earns an annual dividend based on the financial performance of the fund as approved by a board of trustees (the savings and loan association is supposed to be non-profit). 

From the get-go, our work environment can be characterized as very friendly and casual and is more akin to a tightly knit group of friends than a stiff and impersonal workplace. It is therefore not uncommon for colleagues to pass around "co-maker forms" whenever they would like to get a loan from the savings and loan association for those needing additional cash for whatever reason (be it emergency home repairs, car maintenance, school tuition for their kids, etc.). The way it was set up, the person who wants to take out the loan will need a colleague to co-sign the loan application form for every X amount. Need to take out a bigger amount? No problem, simply find more people willing to be guarantors for your loan up to a certain limit of course which is calculated as a function of your capacity to pay/monthly take-home pay. I believe the rule was your total payroll deductions should not exceed 50% of your take-home pay. That includes loan repayments, withholding taxes, government-mandated deductibles like social security and healthcare, and contributions to the savings and loan association. As a side note, the payroll department is managed by HR and is independent of the Savings and Loan Association. The association does require supporting documents from the person taking out the loan to establish the maximum loanable amount (i.e. the employee's pay slip). 

We used to have an actual pay slip written on one of those computer paper forms that you rip open to see the details of your salary and deductibles. That has since been replaced by SAP, a paperless system, where you can download your pay advice in PDF format. 

As it turned out, an enterprising employee thought it was a good idea to forge his pay advice to reflect a much higher salary so that he could take out a higher loan. Of course, we didn't know it at the time but a handful of colleagues, including myself, willingly signed on to be co-makers/guarantors for this person's loan. 

It wasn't until much later that I learned that the whole scheme was uncovered by HR and the Savings and Loan Association. I believe this incident resulted in the eventual termination of the erring individual after an investigation. I only knew about it because I was surprised to learn that I needed to pay the Savings and Loan Association a certain amount every month to pay off a portion of that person's debt since I was a guarantor, and he had effectively defaulted on the loan. 

An image depicting broken trust. Generated using Aria/Imagen3

Although the amount is not that much (it's more of an annoyance since I felt that I had been duped), the whole experience served as a valuable lesson. Being a loan guarantor is not something that you should agree to lightly. Make sure it is somebody you can implicitly trust. Be comfortable in rejecting these requests especially if you are a much junior employee than the other person with minimal disposable income. Nobody should be pressured into doing stuff just because everybody seems to be doing it.