How guarantor liability affects personal finances

Becoming a guarantor for someone’s loan can seem like a noble and supportive gesture. However, many people underestimate the financial risks that come with this commitment. In the eyes of the lender, a guarantor is just as responsible for the loan as the primary borrower. This means that if the borrower defaults, the guarantor is legally obligated to repay the outstanding amount. This arrangement can have far-reaching implications on a guarantor’s personal finances. Here is how guarantor liability affects personal finances.

A guarantor is someone who agrees to pay back a loan if the borrower is unable to do so. Lenders often require guarantors when the borrower has a low credit score, unstable income, or no collateral. The presence of a guarantor gives the lender extra security. Once the guarantor signs the loan agreement, they become legally tied to the debt and cannot easily back out, even if their own financial situation changes.

Guarantors may not be actively involved in the loan transaction once the agreement is signed, but their obligation remains throughout the loan term. Whether it’s a SACCO loan, a personal loan, or even a student loan, the guarantor shares the risk of non-payment.

Impact on Credit Score and Borrowing Power

If the borrower defaults and the guarantor fails to step in, both parties may suffer credit score damage. The default will be reflected in the guarantor’s credit history, affecting their ability to secure future loans. Even if the guarantor pays off the debt, the sudden strain on their finances can still harm their credit profile.

Moreover, being a guarantor can reduce a person’s borrowing power. Lenders consider any guarantees as potential liabilities. This means a guarantor may be denied loans or offered smaller credit limits because part of their income is seen as already committed to a possible future debt.

Strain on Personal Relationships and Mental Wellbeing

Financial disagreements can easily damage personal relationships, especially if the borrower fails to meet their obligations. Guarantors often find themselves caught between maintaining friendships or family ties and protecting their financial well-being. This can cause emotional stress, anxiety, and long-term resentment, particularly if the borrower is uncooperative or dishonest.

Potential Legal Consequences

If a guarantor fails to pay after the borrower defaults, the lender may initiate legal action. This could result in court judgments, asset seizure, or wage garnishment. Some institutions, including SACCOs, have the power to deduct the amount from the guarantor’s account without court involvement. In some cases, multiple guarantors may be pursued simultaneously, depending on the loan agreement.

How to Protect Yourself Before Agreeing to Be a Guarantor

Before signing any documents, it’s vital to understand the full terms of the loan. One should assess their own financial capacity and ability to pay the loan in the worst-case scenario. It’s also important to ask questions: What happens if the borrower dies, becomes disabled, or moves away? Will there be regular updates about the loan repayment progress? These concerns should be addressed upfront to avoid surprises.

Some financial experts advise seeking legal counsel before agreeing to be a guarantor, especially for large loans. Others recommend asking the borrower to provide security or to share regular updates on repayments to maintain transparency.

Author: Andrew Walyaula

Andrew Walyaula is a seasoned multimedia journalist. satrendmagazine@gmail.com