Guaranteeing a SACCO loan can help a friend, colleague or family member access credit when they do not have enough security of their own. But the arrangement comes with a serious financial responsibility.
If the borrower stops repaying the loan, the SACCO does not simply write off the debt because another person received the money. The guarantors may be called upon to help recover the outstanding amount.
This means anyone agreeing to guarantee a SACCO loan should understand what could happen when the borrower defaults, what the SACCO can do, and how a guarantor can protect themselves.
What happens when a SACCO borrower stops paying?
The first step is normally to establish that the borrower has fallen into arrears.
The SACCO may contact the borrower through phone calls, messages, letters or other approved communication channels and ask them to clear the overdue instalments.
The borrower may also be required to explain why they have stopped paying and provide a plan for bringing the loan up to date.
If the borrower resumes payments, the matter may end there.
The situation becomes more serious when the arrears continue to accumulate.
Depending on the SACCO’s loan policy and the terms of the agreement, the SACCO may begin recovery procedures against the borrower and, where applicable, the guarantors.
Can the SACCO make guarantors pay the loan?
This is one of the biggest concerns for people who have guaranteed SACCO loans.
In general, a guarantor accepts an obligation connected to the borrower’s loan. The exact extent of that obligation depends on the SACCO’s rules, the guarantee agreement and the applicable law.
If the borrower defaults, the SACCO may therefore pursue the guarantors according to the terms of the guarantee.
A guarantor should not assume that the borrower’s failure to pay automatically makes the entire loan their personal debt in every circumstance. The actual agreement matters.
Before signing a guarantee, members should read the documents carefully and understand the amount they are guaranteeing, the conditions attached to the guarantee and what happens in the event of default.
Your SACCO savings may be at risk
One of the biggest concerns for a guarantor is the possibility of the SACCO recovering money from their accounts or other member interests where its rules and the applicable agreement allow this.
The precise recovery mechanism varies between SACCOs.
For example, the SACCO’s rules may provide for recovery from amounts that a member is entitled to receive, subject to the law and the contractual arrangements governing the loan.
This is why guaranteeing several people can become risky.
A member may have strong savings and a good repayment record but still face financial consequences if they have guaranteed a borrower who defaults.
What if several people guaranteed the loan?
Many SACCO loans have more than one guarantor.
In such cases, the SACCO will normally look at the guarantee arrangements when determining how the outstanding debt can be recovered.
The number of guarantors does not necessarily mean that each person can simply walk away because there are other people available to cover the debt.
The actual liability of each guarantor depends on the guarantee documents and the SACCO’s applicable rules.
A guarantor should therefore obtain a copy of the guarantee they signed instead of relying on verbal assurances from the borrower or other guarantors.
Can a guarantor lose their savings?
Potentially, yes, depending on the SACCO’s rules, the guarantee agreement and applicable law.
This is why guaranteeing a loan should never be treated as a favour without financial consequences.
Before accepting the responsibility, a member should consider whether they can withstand the financial impact if the borrower stops paying.
Someone earning a modest salary, for example, could face significant financial pressure if they guarantee a large loan and the borrower disappears or becomes unable to repay.
The safest approach is to guarantee only an amount and a person you have carefully assessed.
What happens to the borrower?
The borrower remains primarily responsible for repaying the loan.
A guarantor’s involvement does not normally erase the borrower’s obligation.
The SACCO can continue pursuing the borrower through the recovery mechanisms provided by the loan agreement, SACCO rules and applicable law.
Depending on the circumstances, continued default can also affect the borrower’s relationship with the SACCO and their ability to access future credit.
Where applicable, credit information relating to the borrower may also have consequences under Kenya’s credit reporting framework.
Can the SACCO sell a guarantor’s property?
This depends on the nature of the guarantee, the security documents signed and the applicable legal recovery process.
A guarantor should not assume that signing a guarantee automatically gives the SACCO unlimited power to sell any property they own.
The SACCO must act within the terms of the relevant agreements and the law.
If a guarantor receives a demand for payment or a notice concerning recovery against their property, they should obtain professional legal advice promptly rather than ignoring the notice.
What should you do if the borrower has already defaulted?
The worst response is to ignore the problem.
A guarantor should first contact the SACCO and establish the exact status of the loan.
Ask for information showing the outstanding balance, arrears, repayment history and the steps the SACCO has already taken against the borrower.
The guarantor should also obtain a copy of the guarantee agreement and any relevant loan documents they signed.
This helps establish exactly what responsibility they accepted.
The guarantor should then contact the borrower and demand a clear explanation.
If the borrower has temporarily experienced financial difficulties, the parties may explore whether the SACCO is willing to restructure or reschedule the loan under its policies.
Any repayment arrangement should be documented rather than left as a verbal promise.
Do not pay blindly
A guarantor who is being asked to settle a defaulted loan should establish how much is actually outstanding.
Do not rely solely on the amount quoted by the borrower.
Request an official statement from the SACCO showing the outstanding principal, interest, penalties and any other applicable charges.
The guarantor should also establish whether payments already made by the borrower or other guarantors have been properly credited.
This can prevent unnecessary disputes and helps everyone understand the actual financial position.
Can you force the borrower to repay you?
If a guarantor ends up paying money to settle a borrower’s debt, the guarantor may have rights against the borrower depending on the circumstances and the applicable law.
However, recovering the money from the borrower can become difficult when the borrower has no income, assets or willingness to pay.
This is another reason why a guarantee should be treated as a serious financial decision.
A person should not guarantee a loan simply because the borrower promises, “I will never default.”
How can you protect yourself before guaranteeing a SACCO loan?
The best time to protect yourself is before signing the guarantee.
Start by understanding the borrower’s purpose for taking the loan.
If the money is being used for a productive investment with a realistic repayment plan, the risk may be different from a loan being taken to finance uncontrolled spending.
You should also understand the borrower’s income, existing debts and repayment capacity.
Most importantly, find out the exact amount you are guaranteeing.
Do not sign blank documents or rely on verbal explanations.
Read the guarantee form, loan terms and relevant SACCO rules before signing.
If you do not understand a clause, ask the SACCO to explain it. For a significant loan, consider obtaining independent legal advice before accepting the obligation.
What if the borrower refuses to communicate?
This is where the situation can become particularly difficult.
A guarantor should communicate with the SACCO rather than waiting for the borrower to resolve everything.
The guarantor should ask the SACCO what recovery action has been taken and what options are available under its policies.
If the guarantor believes the SACCO is acting contrary to the guarantee agreement, the member should raise the matter formally with the SACCO and keep copies of all correspondence.
Where the dispute cannot be resolved internally, professional legal or regulatory guidance may be necessary, depending on the nature of the SACCO and the complaint.
Should you stop guaranteeing other people?
If you have already been affected by a default, it may be wise to reassess your approach to guarantees.
A common mistake is guaranteeing several people without considering the combined exposure.
For instance, guaranteeing three separate loans may appear manageable when each borrower is paying normally. But if two borrowers default at the same time, the potential financial exposure can become significant.
Your decision should therefore be based on your ability to absorb the risk, not simply your relationship with the borrower.
Author: Andrew Walyaula
Andrew Walyaula is a seasoned multimedia journalist. Email: [email protected]
