Who is a guarantor?

A guarantor is an individual who takes financial responsibility for another person’s debt or obligation if they fail to meet their repayment terms. This role is common in various financial transactions, including loans, rental agreements, and business contracts, where lenders or service providers seek an additional layer of security. They provide assurance that the borrower or contract holder will fulfill their obligations, reducing the risk for creditors.

Their  Role 

In lending arrangements, a guarantor acts as a safety net, ensuring that a lender does not incur losses in case a borrower defaults. By signing a loan agreement, the guarantor pledges to cover the outstanding amount if the borrower is unable to repay. This role is significant in loans issued by banks, SACCOs, and microfinance institutions, where financial institutions prefer a guaranteed loan over an unsecured one.

They are also required in rental agreements, where landlords may ask for a guarantor to take responsibility for unpaid rent or damages caused by the tenant. Similarly, in business contracts, a guarantor might be needed to back financial obligations, such as the repayment of a business loan or a credit facility extended to a company.

Who Can Become a Guarantor?

A guarantor is typically an individual with a stable financial background and a good credit history. Lenders and service providers assess the guarantor’s financial capability before accepting them for the role. Generally, the following criteria must be met:

They must have a strong financial standing, including a stable income, sufficient savings, and in some cases, assets that can be used as collateral. Financial institutions assess the guarantor’s ability to cover the borrower’s debt if necessary.

They should have a good credit score, which demonstrates their reliability in managing debt. Banks and lenders conduct credit checks to ensure that the guarantor has a history of repaying loans on time.

Some institutions require a guarantor to be closely related to the borrower, such as a family member, close friend, or employer. This ensures a level of trust and accountability between the borrower and the guarantor.

In SACCOs and cooperative societies, guarantors must be members of the same institution to ensure mutual financial security. Guarantors in SACCOs often pledge their savings or shares to secure the loans they guarantee.

Responsibilities and Risks of Being a Guarantor

Being a guarantor is a serious financial commitment with potential risks. The most significant responsibility is covering the outstanding debt if the borrower defaults. This means that the guarantor’s assets or savings could be seized, or they may be required to make direct payments to settle the loan.

A guarantor’s credit score can be negatively affected if the borrower defaults. In cases where the lender reports late payments or non-payment to credit reference bureaus, the guarantor’s financial reputation could be damaged, affecting their ability to access credit in the future.

Since they are often limited in taking new loans while guaranteeing someone else’s loan, their borrowing capacity may be affected. Many financial institutions consider the guarantor’s commitment as an existing liability, which can reduce their ability to access credit.

Legal consequences may arise if the borrower fails to pay and the guarantor is unable to settle the outstanding amount. In extreme cases, lenders may take legal action against guarantors to recover the owed amount.

How to Protect Yourself as a Guarantor

Before agreeing to become a guarantor, it is important to fully understand the terms and conditions of the agreement. Reviewing the fine print helps determine the extent of liability and whether there are alternative options to mitigate risks.

A guarantor should evaluate the borrower’s financial discipline and ability to repay the loan. This includes assessing their income sources, past repayment history, and the purpose of the loan.

Seeking legal or financial advice before signing a guarantee agreement can help a guarantor understand their obligations and the potential risks involved. Consulting an expert ensures that the guarantor is making an informed decision.

Some lenders provide an option for limited liability guarantees, where the guarantor is only responsible for a specific portion of the debt rather than the full amount. Exploring such options can reduce financial risks.

Author: Andrew Walyaula

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