Borrowing money could always be risky. Once we fail to meet our deadline or comply with the bills we have to pay, it easily affects our record and future steps. Which is why it’s ideal to have contingencies for unexpected situations that could happen.
Have you heard of a loan guarantor? This meant diving into someone else’s mortgage agreement for support. Although it can put a lot of uncertainty and exposure to your assets, we’ll enlighten you about its roles and responsibilities to minimize these dangers.
What does being a Guarantor mean?
A guarantor is a person who permits to be responsible for paying the loan if a borrower defaults. It provides a guarantee for a particular credit by securing their own property. Generally, should a borrower cannot make any repayments on the loan accepted, the lender can demand them from the guarantor instead. Guarantors are asked to sign a guarantee agreement, a legally binding document, that will allow them to handle your payments once necessary.
If you’re wondering whether a person needs loans with guarantor, it all comes down to how creditworthy a borrower is. If there is any reason to doubt they might be able to compensate prior to a due date, like a weak credit score or a bad credit history, it’s likely the moneylender will look for a backup.
For individual loans, a guarantor you need might be required when the loan applicant profile is insufficient on its own merit, for example, an applicant is a student or a fresh working adult. For a company loan, banks and licensed moneylenders want to have a natural person linked to the company as a guarantor, such as the director, shareholder, or even the next of kin. As a private limited company has limited liability, the guarantor provides the next level of assurance.
Note that, anyone can be a guarantor. Normally, it is a parent, spouse, sibling, a relative, a close friend, or even a grandparent. However, you should only be a guarantor for someone you trust and are willing and able to cover the repayments for. Those who are over 21 years old, with a good credit history and financial stability, can apply as a guarantor. And if you are a homeowner, this will add credibility to the application.
Your Responsibilities as a Guarantor
While you’re considering asking someone to be a guarantor, or you’ve been approached by a family member or a pal in need, make sure you understand the risks involved and be as responsible as if you were taking out a loan for yourself.
Once you are approved as a guarantor, you are immediately liable for the borrower’s debt. If either you or the borrower can’t return the guaranteed credit, it’s listed as a default on your credit report. This makes it harder for you to borrow money for yourself in the future. And when you apply for it by the time, you’ll have to tell your moneylender if you’re a guarantor on a loan. They may decide not to accommodate you, even if the loan with guarantor (that you guaranteed) is being repaid.
As a guarantor, you will also be liable for further charges, legal costs, and interest. Remember that once the borrower can’t make the loan repayments, you will have to pay back the entire loan amount including its interest and extra fees. If you fail to do that, the moneylender could repossess your properties if it was used as security for the loan. If you are in default of over $10,000, you can be subject to bankruptcy proceedings. It faces many consequences such as restrictions on taking a loan, engaging in business, and even leaving the country.
Worse, if you end up out of pocket it could affect a close relationship.
Things to consider before agreeing to become a Guarantor
As we have mentioned earlier, acting as a guarantor for someone else’s loan is crucial enough that you need to understand the consequences you may encounter upon agreement. Once you sign up to be a guarantor, it can be difficult to change your mind later. Below are factors you can weigh before considering:
1. Are you able and willing to pay the principal loan amount?
Before anything else, this is the most important question to answer. When you sign as a guarantor, you are allowing to take on all of the borrower’s obligations as you have settled out a loan agreement. Should your borrower friend or family member fail to pay its credit when needed, you, automatically, will be held responsible for the payment and shoulder it
2. How likely is it that the borrower will be able to repay the loan?
Think of the borrower’s other liabilities, existing loan repayment commitments, the amount and reliability of the borrower’s income as well as its borrower’s credit history. These are issues the moneylender will be checking when giving the loan. As a guarantor, you will bear a heavier task than a moneylender because you have bigger shoes to fill in for the borrower.
3. What other circumstances would trigger an obligation to pay?
It’s likely that some loan agreements permit moneylenders to recall the loan from the guarantor in scenarios other than the borrower’s failure to comply with payments. Expect that if you breach your loan contracts, there will be a huge outcome to face. Usually, the borrower and guarantor are both explicitly designated as being jointly accountable for the debt. The moneylender can then choose to pursue either or both parties for repayment, at its option.
4. What are the consequences if you are unable to pay when the moneylender seeks to recover from you?
Take note that it will easily affect your credit score which makes it difficult for you to apply for future loans. However, the most possible outcome is that the lender will apply to make you bankrupt. This could result in being restricted to engage a lawyer to sue someone, hold directorship of a company or your eligibility for many kinds of employment, and leave Singapore without explicit permission from the Official Assignee.
5. Can you sue the borrower to recover the debt from them?
You can. However, even if you have successfully sued the borrower, you will likely just end up wasting legal costs on a paper order that cannot be effectively enforced.
The bottom line is, before agreeing to become a guarantor for loan, a long process of thinking and consultation with an advisor would be necessary. Do not ever hesitate to assess yourself and your status whether or not you are capable of being granted such responsibility. Your decisions affect your future.
