Will you risk your savings and credit report to be someone’s loan guarantor? The decision to become a loan guarantor should never be made hastily.
Being a loan guarantor isn’t as straightforward as it seems. There’s more to it than earning the label of ‘most helpful friend in the world’. In fact, there are many responsibilities that lie on the shoulders of the loan guarantor. Should things turn south and the borrower is unable to repay his or her debt, there could be serious implications for the guarantor, too.
What are some situations where you may find yourself being asked to be someone’s loan guarantor? When the borrower needs a guarantor to take up a personal loan, car loan, study loan, home loan, renovation home, business loan, or even a loan from a licensed moneylender or loan shark.
- What’s a loan guarantor
- Loan guarantor responsibilities
- What to look out for
- Implications for the guarantor
- How to protect yourself
What does it mean to be a guarantor for a loan?
A guarantor is someone who has agreed to take on the responsibility of paying off the borrower’s loan obligation in the event that he or she defaults. There’s no way around it — the guarantor is liable to meet the outstanding loan obligation.
You’ve agreed to be the guarantor for your friend’s renovation loan. However, due to financial difficulties, he’s unable to repay his debt. You, as a guarantor, will be liable for paying off this debt. Effectively, you could wind up being the one paying for a big part of his home renovation project. Of course, the nicely done up home still belongs to your friend.
Loan guarantor responsibilities
The responsibilities that lie on the shoulders of a loan guarantor are immense, to say the least. Besides having to pay off the borrower’s debt — while not knowing if it’s possible to recover one’s own money from the borrower — the loan guarantor is also liable for charges, legal costs and interest charges should payments be delayed.
That’s not all. The lender isn’t obliged to take action against the borrower first before taking action against the loan guarantor.
How soon might the lender request for the loan guarantor to repay the loan? This could be as soon as when the borrower misses a principal or interest repayment.
What to look out for
Your obligations as a guarantor
Before you even consider being a guarantor for someone, be very clear about your obligations. This means zooming in on and understanding fully all those jargon, clauses, terms and conditions stated in the loan agreement. Be thorough — you have the right to get the lender to explain everything clearly in detail.
For example, you may not even be able to take action against the borrower until the lender has recovered all amounts owed first. In other cases, the lender may automatically deduct your money held in a savings account or request payment from you without having to prove they’ve already gone to the borrower but were unsuccessful in getting any payment out of the borrower.
Ask yourself difficult questions
You have to be truthful with yourself and whoever’s asking you to be the loan guarantor. Here are some questions to start you off:
- Does the borrower have the means to repay his or her own debt in full?
- Does the borrower have a reliable credit history?
- How is the borrower intending to pay off his or her own debt?
- Has the borrower pledged any collateral or security for the loan? (If yes, your risk as a guarantor may be lower.)
- Can you afford to pay off someone’s debt?
- Are you willing to pay off someone’s debt?
- Are you willing and able to pay off someone’s debt (including interest) knowing that you may never be able to recover your money?
- Will this relationship be ruined if you were to pay off this person’s debt even if you have to compromise your own family’s financial stability?
What happens to the guarantor if the borrower does not pay?
There could be serious repercussions if the guarantor is unable to settle the debt for the borrower.
At the top of the list, the guarantor’s personal property may be seized. A negatively impacted credit report can make it difficult for the guarantor to borrow in the future, too. The inability to borrow to finance one’s home, car or further studies can translate into a lifetime’s worth of resentment and missed opportunities.
The guarantor may even have to face bankruptcy and deal with the onslaught of consequences associated with being declared bankrupt, such as loss of employment due to contractual breach, inability to leave the country freely and severe implications on future career prospects.
Therefore, think very carefully before agreeing to become someone’s loan guarantor. Can you afford to lose your money — or more?
How to protect yourself
The first thing you should do if someone approaches you to become their loan guarantor is to assess your own financial circumstances as well as this person’s repayment capacity (i.e. ability and willingness to repay their own debt).
Can you truly afford to be someone’s loan guarantor? Ask yourself and the borrower lots of difficult questions even though they may be uncomfortable to answer them. You have the right to know details of the borrower’s credit history, existing financial obligations, income and assets.
While you’re at it, read the loan agreement’s terms and conditions very carefully. It is advisable that you also engage a lawyer to advise you on the real implications of what you could be signing up for. This is to ensure you’re fully informed of the risks of being someone’s guarantor.
Think twice or even thrice before giving an answer. There is no shame in letting your family/friend know you’re unable to help if you’re not in the financial position to be responsible for their loan.
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