Have you ever sat down and seriously thought about what it means to be a guarantor? Or to you, is it just a quick favor you are according a comrade?
Well, today, let’s pound you back to reality.
Being a guarantor does not equate to simply putting your name on the dotted line to show that you know ‘this person.’ It means that you are betting your money (and your sanity) on it in case the person defaults in his commitment to pay.
Your signature on the dotted line makes you the secondary borrower. It legally binds you to pay off the debt if the primary borrower defaults. You are putting your assets - including cash, bank accounts, personal property, etc. - on the line.
In case of any eventuality, this single commitment could push you to bankruptcy or at the very least affect your credit standing - which means that it could potentially dim your chances of getting favorable credit rates in the future.
Too many problems, right?
Under the Law of contract Act Cap 23, Laws of Kenya, a guarantor is a person (or company) who agrees to guarantee a debt. In contrast, a guarantee is a legal assurance by the person who will carry the financial burden if the borrower cannot pay for one reason or another.
Therefore, he who gives a guarantee is a guarantor.
There is no going back once you sign that document binding you to the debt as a guarantor - you cannot change your mind and revoke it any time you want. As a matter of fact, banks and financial institutions often consider the loan that you guarantee as your loan.
It is, therefore, crucial to understand what you are getting yourself into before you commit. Whether it is a close friend or even a close family member, there is always a risk involved. You can easily gauge the person’s ability to repay, but you can never predict another person’s behavior.
Geoffrey and Otieno worked in the same finance department for over ten years. They joined the company at the same time and watched each other grow through both their careers and personal lives.
They were both members of the same SACCO (a SACCO catering for members of the accounting profession), and through the years, they practically funded each other’s projects by acting as each other’s guarantors for loans from the same SACCO.
They had already built a very trusting relationship, and so when Geoffrey approached John for his next loan to start a logistics business, there was no hesitation on Otieno’s part.
Geoffrey resigned from employment to go and start his new venture. However, six months into the debt, Geoffrey disappeared without a trace. Consequently, Otieno found himself deep into the mess of repayment of six million shillings that he never enjoyed.
Well, this is what being a guarantor entails. The guarantor is liable to pay the debt once called upon, and the creditor does not need to exhaust all other available means to try and recover their money.
Here are the primary obligations of a guarantor;
So, before you sign any documents as a guarantor, ensure you read and understand your obligations to the debt in question.
Here is a summary of what might go wrong if the debt you guarantee is not paid back on time;
But it is not all dark and gloom. As a guarantor, you also have the rights that protect you from the high risks of guaranteeing a debt.
The truth is, this is entirely up to you. As you can tell, acting as a guarantor for someone else's debt can be a life-changing commitment. But sometimes, it involves an essential step in your loved one’s life, and therefore, you can not run away from it. In fact, it might also be your turn one day.
Therefore, instead of overthinking, it is better to understand and prepare better. So here is what to pay attention to;
This is a no-brainer, but many people do not even take the time to read through the document they are signing. It is essential to ensure that you have all the information related to the loan - the repayment period, the interest, etc.
Check the loan amount and carefully assess the percentage you would be willing to be liable for. Clearly state this on the document before you put your signature.
As much as you want to do a friend a favor, you want to be confident that the person is taking the loan for the right reasons. These might include borrowing reasons that are aimed at making more money out of the loan, or necessities and unavoidable circumstances.
Well, they need to pay back their debt, right? If they are not able to pay, the liability automatically falls on you. Therefore, you need to know whether they have the capability to repay the loan.