Your daughter has been sent home for school dues. When you go to your bank to withdraw some money and pay the fees, the teller informs you that the account is in the red. You approach the inquiry desk to find out what the problem could, and you politely told that the bank is recovering a loan that you guaranteed.

This kind of unfortunate scenario happens often, leaving those who act as guarantors for their comrades rueful. This article gives a non-legal advice to those who are going to enter in a guarantee.

A guarantee is a promise made by a guarantor to honor the performance of the obligation of some other person. When your friend wants to borrow money from the bank, the bank will want to be sure that your friend does not default in loan repayment.

It will take security from your friend and ask your friend to bring someone who will guarantee the loan. When you sign the guarantee form, a contract is created between you and the bank called the creditor. Once your friend (the debtor) fails to pay the loan you will be liable to pay. 

It is a good thing to help others to sign the guarantee because that may be the only way for them to come out of their financial problem. More so, next time it will be you in financial need and they will help you. 

Guarantor’s liability is secondary. This means you are not required to make payment to the bank so long as the debtor continues to fulfill his obligation to pay the loan. In most cases, you do not even realise that you are a guarantor when things are going normally.

The problem comes when the debtor fails to make payment to the bank. The bank will inform you of the default and proceed to recover the money from you. Suppose your salary is paid through this bank, it will be easy for them to divert your money to meet the loan. Some banks will not waste resources in going after the security pledged by the debtor. They will go after the soft target, which is your salary. When you have come into this situation, you need to seek for a professional advice.

What normally happens is that when negotiation fails and the bank has finished deducting your money, you can start a process of recovering your money from the debtor. Payment of the loan entitles you to have right over the property that the debtor pledged to the bank. You can request the bank to deliver that right to you so that you can possess the property.

Alternatively, you can sue the defaulter in hope to recover your money. This process can be tedious and stressing. First because the person is your friend and secondly the person has already proved to be in financial problem.

If two or more people guaranteed the loan, each of you share the burden equally. For a debtor who borrowed Rwf1 million and two of you guaranteed it, each of you is liable to pay Rwf500,000 plus any interest if the defaulter fails to pay back anything.

Even in this scenario the bank can chose to recover the full loan from one of the creditors, especially when it is hard to get money from the other guarantor. When this occurs, the guarantor who has paid all the loan can request the other guarantor to reimburse him half or part of what he owed and then recover the other from the debtor.

It is this kind of complications that should inform a prospective guarantor to be careful in signing loan guarantee. There is no problem if the person you are signing for has a regular income and is trusted or is your close relative.

Where the debtor does not have a regular income the best you can do to help him is to limit the amount you can guarantee to help you manage to pay should he default. You can then promise to guarantee more should the person prove to be faithful in paying.

The writer is a Kigali-based lawyer currently doing professional Minternship at Rwanda Stock Exchange