What does Proverbs 20:16 mean?

This verse emphasizes the risk a creditor takes in granting a loan. The debtor or cosigner may never repay the debt. The creditor—the one lending money or property—is advised to hold something from the borrower to help guarantee the debt will be repaid. The garment, in this case, serves as a pledge. Exodus 22:26–27 mentions this exact practice, but insists on a level of human decency: "If ever you take your neighbor's cloak in pledge, you shall return it to him before the sun goes down, for that is his only covering, and it is his cloak for his body; in what else shall he sleep?" Deuteronomy 24:10–13 adds this further instruction: "When you make your neighbor a loan of any sort, you shall not go into his house to collect his pledge. You shall stand outside, and the man to whom you make the loan shall bring the pledge out to you. And if he is a poor man, you shall not sleep in his pledge. You shall restore to him the pledge as the sun sets, that he may sleep in his cloak and bless you. And it shall be righteousness for you before the LORD your God."

Other proverbs warn about taking on debt, especially on behalf of others (Proverbs 6:1; 11:15; 22:6). This statement seems to emphasize caution about the character of those who seek to borrow. The phrasing refers to lending "for a stranger" and "for foreigners." "Foreigners" is translated from the Greek nākri. This is the same term used in Proverbs 7:5 in reference to an immoral woman. In the Old Testament context, "foreigners" were not merely people of other cultures, they were worshippers of idols (Deuteronomy 7:1–5). Lending is risky enough—lending to immoral or ungodly people is even more dangerous.