A customer looks at a loan application form. By agreeing to guarantee someone, you are assuming responsibility under the law, subject to the terms outlined in the guarantee agreement. PHOTO/FILE


What you did not know about being a loan guarantor

What you need to know:

The guarantor should regularly monitor credit reports to stay informed, as any delays or defaults in loan repayment will impact the guarantor’s credit standing. 

When you are considering asking someone to be a guarantor, or you have been approached by a family member or friend in need, you need to know the possible financial risks.
Once a person becomes a loan guarantor, he or she cannot withdraw from this position at their convenience.

Counsel Elison Karuhanga, an attorney at Kampala Associated Advocates (KAA), says being a guarantor requires assuming responsibility for fulfilling someone else’s agreement if they are unable to do so. It is essentially stepping into their shoes in the event of their failure to perform.

He emphasizes that when you choose to act as a guarantor, you are legally binding yourself to an obligation. By agreeing to guarantee someone, you are assuming responsibility under the law, subject to the terms outlined in the guarantee agreement.

“If the borrower does not repay the loan, you will be legally responsible for paying the debt. In fact, if you agree to become a guarantor, you are as well a principal debtor. Even the Bible states it well that if you guarantee someone they will take your bed as well, this an old principle of law,” Karuhanga says.
Allen Aber, a shopkeeper, says that she went to borrow money from a financial institution. But the moment she expressed interest in applying for the loan, she was asked for a guarantor.

She says on seeking clarification  on the requirement for a guarantor, she learned that lenders frequently request loan applicants to provide guarantors when they have doubts about the primary borrower’s or co-borrowers’ ability to meet payment obligations.

Apart from the financial burden, these situations can sometimes end friendships or cause family feuds. In Aber’s case her business, which was Kiosk, was towed off the streets by Kampala Capital City Authority. So the financial institution had to persuade her brother who guaranteed her to repay the loan.

For Counsel Friday Kagoro, an attorney at Muwema and Co. Advocates, in legal terms, a guarantor is an individual who assumes responsibility for a debt incurred by another person. In the event that the debtor fails to fulfill their obligation, the guarantor steps in to pay off the debt.

Explaining that both the borrower and the guarantor should think seriously about whether they can commit to maintaining the payments.
He says as a guarantor, you should keep close tabs on the repayment activities in the guaranteed loans. Additionally, the guarantor should regularly monitor credit reports to stay informed, as any delays or defaults in loan repayment will impact the guarantor’s credit standing.

According to Daniel Babonereirwe, the executive director of BANAR Consults Limited, lenders may ask for loan guarantors because of inadequate credit score of the primary loan applicant.
Others include; risky employer profile or job profile loan amounts exceeding the borrowers eligibility among others.

Mr Babonereirwe explains that the guarantor serves as the backup repayment source, often unseen, for individuals or entities seeking loans, providing assurance to lenders in cases where the primary borrower’s financial capacity is uncertain.
Mr Babonereirwe says in certain instances, individuals borrow on behalf of their company while offering personal assets, such as property, as collateral. In these cases, they grant powers of attorney to the bank, enabling the institution to utilise their personal property as security for the loan.

For the case of Uganda, Mr Babonereirwe says, guaranteeing often directly involves individuals because many small and medium-sized enterprises (SMEs) are owner-managed. The decision-maker, typically the owner, often acts as both the board and individual making decisions, blurring the lines between personal and business responsibilities. For instance, someone might incorporate their business to shield themselves from personal liability, but in practice, their personal assets may still be at risk due to guarantees or personal commitments made to secure loans or conduct business.

Explaining that this proprietor inquired why they wanted him to guarantee his company which is a different entity from him.
However, he refused to be a guarantor, saying that the company can secure itself. So, if you have five companies and they keep on guaranteeing each other, that means management of that company is doing nothing.

Mr Babonereirwe says the main reason why people incorporate business is so that liability does not come to them in person.
He gives another example of the telecom companies in Uganda that if they want to borrow the banks will not ask for personal guarantees of directors as they are not necessarily the shareholders.

He asserts that even if you went and attached all the directors’ own, you may not recover what the telecom borrowed. A guarantee may be ongoing or a fresh guarantee by in most cases lending facilities prefer fresh guarantees so that we avoid mix up.

Mr Babonereirwe mentions that if a company is to guarantee another, there is a need for a board resolution that they have allowed to guarantee a certain entity. By the way it is a sister company in most cases and liability can go to them in case a principal borrower does not pay.

Besides that, there are employers who guarantee loans for their staff. So practically anyone can be a guarantor and it is often a parent, child, spouse or relative as long as you have separate bank accounts.