Many of us are not aware of the responsibilities of being a guarantor. As a result, many are caught off guard, upon receiving a demand letter from the lender. According to legal requirements, anybody can be a guarantor provided he or she is:
- More than 18 years old;
- Not a bankrupt;
- Is of sound mind, able to comprehend the conditions and the consequences of guaranteeing a loan; and
- Entering the agreement on his or her own discretion, without any coercion from another party.
To put things into perspective, guaranteeing a loan is more than just a formality. A guarantor means that if the person who borrowed the money is unable to repay the loan, you become legally liable to pay the balance owed. And this could include not only the original amount borrowed, but also the interest and all other charges. In addition, it has to be highlighted that you:
- Do not have any rights to any of the property or goods the borrower is purchasing from the loan; and
- Do not have a positive credit record which can enhance your financial standing. In other words, it will not make it easier for you to get a loan of your own.
With the huge financial responsibilities entrusted on guarantors, you should be wary whenever asked to be one and exercise some caution before agreeing.
Before becoming a guarantor
Among the things that you should consider are:
- What is the total amount borrowed?
- How mature and responsible is the borrower?
- How stable is the employment of the borrower?
- Does the borrower have any other means of repaying the loan should she or he be unemployed?
- Can you afford to repay the total amount of the loan if the borrower cannot or will not honour the loan?
The key here is to get as much information as possible on the borrower especially his/her financial capacity to pay back the loan. So it will be wise to know if he/she has a regular income or any other source of income to repay the loan. And most importantly, you should be asking yourself whether you would be able to pay the loan if something went wrong, along with your other expenses and repayments. And ask yourself whether you really want to sacrifice your hard-earned money should the borrower fail to make the repayment.
The right of a guarantor
If, after evaluating all the possibilities and consequences, you agree to be a guarantor, then you are entitled to certain rights which include:
- Receiving a copy of the loan or credit agreement which the guarantee applied for. The agreement should contain the following information:
- The amount of the loan:
- The interest rate on the loan;
- Is the borrower putting up security for the loan;
- The term of the loan; and
- The amount of the monthly repayment
- The right to get the information on the amount of outstanding balance;
- The right to get legal advice from a lawyer before agreeing; and
- The right to claim the money back from the borrower if you pay the debt as the guarantor. However, it will probably be difficult to get your money back from someone who could not pay his or her debts in the first place.
What happens if the borrower defaults?
If the borrower defaults the payment, the finance company must send you the same notice which it sends to the debtor. This will give you information about how much the borrower has fallen behind in his/her payments. Should the lender fail to recover the debts owed by the borrower through all the possible means, the lender will then have the right to start legal action against you, the guarantor.
However, as stipulated under Bankruptcy Act 1967, the sequence of actions taken (taking legal action against the borrower first, failing which, legal action is then taken on the guarantor) is only applicable to “social guarantors” – those who provide guarantee on hire purchases, housing loans or educational-related loans. Other than guaranteeing for such loans, the guarantors may be subjected to legal action, taken at the same time on the borrower.
In the event of death, the lender will freeze the loan account and try to recover the debts through the deceased’s assets. If that fails, the lender has the right to recover the debts from you, the guarantor.
Things to consider
Before agreeing to be a guarantor, you should:
- Read and understand all the documents prepared in relation to the guarantee;
- Always seek explanation from the loan officer if you do not understand certain clause;
- Seek legal advice from a lawyer on the legal implication of signing the guarantee;
- Make thorough personality and financial judgement on the borrower;
- Do not agree to sign if you are in doubt of the borrower’s capability to repay the loan;
- Do not agree to be a guarantor because of family and peer pressure; and
- Take immediate action if you receive demand letter from the lender. Ignoring or delaying the problem will only make matters worse.
Being a guarantor is a huge responsibility and highly risky. Many people have been declared bankrupt because they consented to act as guarantors. So before giving your consent to be a guarantor, make sure you fully understand all the risks involved, including the financial woes you might face should the borrower default in his/her loan repayments.
