The Role of Guarantors and Co-Signers in Your Credit Profile
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Default rates in Kenya’s mobile loan app sector are high, with the 2021 FinAccess survey showing 46.3% of digital app loan borrowers defaulted. This shows how risky the lending environment has become for both borrowers and those who support them, especially guarantors and co-signers in Kenya.
With personal and household loans accounting for 26.6% of gross loans, many individuals who step in to help borrowers access credit often end up exposed when defaults occur.
A guarantor acts as a backup payer, agreeing to settle the borrower’s debt only if the borrower fails to do so. Guarantors do not share ownership of the financed asset, such as a vehicle or house, and are not initially required to make payments.
Their role is secondary and contingent on the borrower’s default. On the other hand, a co-signer, also known as a co-obligor, assumes joint responsibility for the loan from the very beginning.
The co-signer’s name appears alongside the borrower’s on the loan agreement, and both are legally liable for repayments.
In most cases, co-signers have shared ownership of the financed asset, linking them directly to both the benefits and risks of the loan.
This difference is established under Kenya’s Law of Contract Act (Cap 23), which outlines how guarantors and co-signers are treated in financial agreements.
For borrowers, involving either party often improves their chances of securing credit, especially for those with limited borrowing history such as young people, informal sector workers, or small business owners.
Lenders consider these arrangements lower risk because they provide an additional assurance of repayment. This can lead to better loan terms, including higher limits or lower interest rates.
When repayments are made on time, the borrower’s credit profile strengthens, improving access to future financing.
However, defaults can have lasting consequences. Under Credit Reference Bureau (CRB) regulations, negative listings can remain on a borrower’s record for up to five years, damaging their reputation with lenders.
The situation is even more delicate for guarantors and co-signers. Before 2018, guarantors enjoyed some legal protection, they could not be listed with CRBs for defaults made by borrowers.
But a High Court ruling in 2018, which upheld amendments to CRB reporting rules, changed that position. Today, guarantors are treated as co-obligors in credit data, meaning they can be reported to CRBs for defaults even if they never directly used the loan funds.
If a borrower misses payments, the guarantor’s credit profile in Kenya is immediately affected. Their credit score drops, access to new loans becomes restricted, and in some cases, lenders may seize assets or savings under the Banking Act to recover the debt.
For co-signers, the impact is immediate and automatic as the entire loan is reflected on their profile from the start. Because of joint liability, a missed payment affects both credit files equally.
While regular repayments can maintain stability, they do little to boost the guarantor’s or co-signer’s score, as they are not the primary borrowers. On the other hand, defaults can trigger subrogation rights, where guarantors can legally pursue the borrower for reimbursement.
However, by that time, their own creditworthiness has already been compromised.
Under the Banking (Credit Reference Bureau) Regulations, 2013, amended in 2020, CRB reports now include detailed information about guarantors, such as their identity, loan details, and repayment status.
This transparency benefits lenders but raises risks for guarantors: one default can lead to blacklisting, which restricts access to credit, business financing, or even employment opportunities that require a clean financial record.
For co-signers, loans appear as full liabilities on both credit files, increasing their debt-to-income ratios and potentially limiting future borrowing capacity. This makes it vital for both parties to fully understand their responsibilities before agreeing to support a loan.
Jefferson Wachira is a writer at Africa Digest News, specializing in banking and finance trends, and their impact on African economies.
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