Guarantor and Guarantees: Know When to Say No

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? 

What Is the Difference Between a Guarantor and a Guarantee?

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. 

What Are the Guarantor’s Obligations?

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;

• Guarantor liability.  Your signature makes you fully liable - the same as if you borrowed the money yourself. 
• Payment on demand. The lender has the authority to demand from you at any time - they have no obligation to prove any attempt of recovery from any other means.
• Liable for all costs. You are not only liable for the loan but also other charges including, legal costs, processing fees, interest rates, etc. 
• Restructuring. The lender can restructure the loan at any time without the need to involve you. 
• Risk to personal property. The lender can access your assets at any time. For example, they can deduct your monies from your current and savings account without the need to consult you. 
  

So, before you sign any documents as a guarantor, ensure you read and understand your obligations to the debt in question. 

What Are the Risks of Being a Guarantor?

Here is a summary of what might go wrong if the debt you guarantee is not paid back on time;

• You may have to pay back the debt
• You may get kicked into bankruptcy
• Your credit standing is likely to be affected (you might end up being listed on CRB, and this may affect your chances of getting a loan in the future)
• The stress associated with the whole situation might affect your mental health negatively. 
• Damage to personal relationships.

What are Your Rights as a Guarantor?

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. 

• Right to subrogation. If you pay money to the lender, you have the right to recover it from the borrower. Further, you even have the right to take them to court and claim your money or property back. Like in the case of Henry Mbugua vs. Patrick Gachie Kigo HCCC 652/2004. 
• The right to specify the percentage of the loan you want to guarantee. Some loans have more than one guarantor. So it is essential to be very specific on what percentage of liability you are willing to shoulder. 
• Right to information. You have the right to have all the information concerning the loan—request copies of the contracts and any other document involved. 
• You have the right to be notified of the loan progress. You have the right to receive notifications for the loan’s progress so you can prepare yourself in case of any eventuality. 

When You Should or Shouldn't Be a Guarantor

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;

Terms of the loan

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. 

The loan size

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.

The purpose of the loan

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. 

The repayment ability of the borrower

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.