Understanding guarantor risks and rewards
Becoming a guarantor is a decision that comes with both responsibilities and potential benefits. In many financial settings, especially in cooperative societies (SACCOs), banks, and microfinance institutions, guarantors play a key role in securing loans for others. While the process may seem straightforward—vouching for someone else’s ability to repay a loan—it is important to understand the implications that come with this commitment.
A guarantor is an individual who agrees to take responsibility for another person’s loan if that person is unable to repay it. In other words, if the borrower defaults, the guarantor is legally obligated to settle the outstanding amount. Guarantors are often close friends, relatives, or colleagues of the borrower, and their financial credibility is considered by lenders during the loan approval process.
Risks Involved in Being a Guarantor
The most significant risk is financial liability. If the borrower fails to meet their loan obligations, the guarantor must pay the loan, including any interest or penalties. This can put a strain on the guarantor’s personal finances and credit rating. Moreover, being a guarantor can affect one’s ability to secure their own loans in the future, as it counts as a financial obligation on their credit profile. Additionally, in cases of default, lenders may recover the money by seizing the guarantor’s savings or assets, particularly in SACCO arrangements where members’ savings can be used to offset loan balances.
Another risk is the potential strain on personal relationships. If repayment becomes an issue, it can lead to conflict and loss of trust between the borrower and the guarantor. Many people have found themselves caught in emotional and financial turmoil simply because they agreed to help someone without fully understanding the risks involved.
Benefits of a Guarantor
Despite the risks, there are potential rewards to being a guarantor. For one, it can be a way to help a trusted friend or family member access financial support when they need it most—be it for education, a business venture, or medical expenses. For SACCO members, helping others may foster a sense of community, trust, and mutual support. Additionally, being a guarantor can build goodwill, and in some cases, the favor may be returned when the guarantor needs similar assistance in the future.
In workplace SACCOs or closely-knit financial groups, members who consistently act as reliable guarantors may be viewed as trustworthy and responsible. This can strengthen their standing within the group and may even lead to favorable treatment when applying for their own loans.
Author: Andrew Walyaula
Andrew Walyaula is a seasoned multimedia journalist. waliaulaandrew0@gmail.com
