The decision to act as a guarantor has become a catch-22 situation for many members of Savings and Credit Co-operative Societies (Saccos). Numerous members have lost their hard-earned money due to defaults by principal borrowers they guaranteed.
Many members have voiced their dissatisfaction with the current laws, arguing that they do not adequately protect guarantors.
The Sacco lending model requires a specified number of guarantors to secure all loans, which makes it easier and faster to obtain a loan from a Sacco than from a commercial bank. The guarantors, who are also members of the Society, provide additional security, protecting the institution from potential defaults.
The Financial Markets Conduct Bill of 2023 aims to safeguard the interests of both borrowers and loan guarantors by requiring lenders to fully disclose information to potential borrowers and guarantors before granting loans.
Under this law, lenders must provide a pre-contract statement and quotation that details all loan terms, including the number of installments, repayment dates, and the total amount owed (including the principal, interest, loan fees, and charges). It also prohibits lenders from charging or recovering interest rates that exceed the maximum rates set by the Financial Markets Conduct Authority.
Co-operatives rely on the relationship between the borrower and guarantor to recover the loan amount, operating under the assumption that borrowers value their relationship with the guarantor and will repay the loan to avoid inconveniencing their friends.
Thinking of guaranteeing a loan? Pause and get the facts first!
Before you sign anything, make sure you understand what you are getting into:
- Know the Borrower: How well do you know the person? If they default, can you reach them easily?
Understand the Amount: Be clear about how much you are guaranteeing.
- Check for Collateral: Is there any collateral or security involved? Are your savings at stake? If yes, how much?
- Declare the Amount: Ensure that you declare the exact amount you are guaranteeing. If you don’t, you might be liable for the entire loan.
- Keep Records: Make sure to sign and keep a copy of the agreement.
Your Responsibilities:
– Monitor the loan repayment.
– Request regular updates on the loan’s performance.
– If the borrower asks for an additional loan (a top-up), you will need to sign a new contract.
In Case of Default:
– Your SACCO (Savings and Credit Cooperative Organization) must notify you in writing within one month if the borrower defaults.
Remember, being a guarantor is not just an act of trust; it’s a legal contract.
Know the facts, protect yourself, and make smart choices!
What is a Loan Guarantee?
A loan guarantee is a promise by a third party to repay a loan in case the borrower is unable to do so. It acts as financial insurance for the lender, assuring them that they will get their money back even if the borrower defaults. The guarantor, who is often someone known to the borrower, agrees to cover the outstanding debt if the borrower cannot repay the loan. Loan guarantees are commonly used to make lending possible for individuals or businesses who may not qualify for a loan due to factors such as insufficient collateral coverage, credit history, or other risk factors. Guarantors provide additional assurance to lenders that the loan will be repaid. Guarantors are legally bound to fulfill the borrower’s obligations in case of default, and the lender assesses their creditworthiness before the loan is approved.
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