Weigh the risks: Agreeing to be someone’s loan guarantor is a hefty responsibility and a decision that should not be made lightly. Photo credit: Unsplash
You have probably heard horror stories regarding loan guarantors. You know, the ones where said person trusted his good friend so much that he agreed to be the guarantor of his loan.
All goes well until the “friend” takes off one day, leaving the poor chap saddled with debt he didn’t even ask for in the first place, but which he is now forced to repay.
Sad to say, these stories exist for a reason – firstly, because they do happen; and secondly, because it is indeed a risky undertaking to be someone’s loan guarantor.
So if your friend or family member has approached to be one, it’s normal to feel worried about it.
There are various types of loans that require a borrower to find someone who is willing to be a guarantor, who will then co-sign on the loan.
Examples include housing loans, education loans, renovation loans, car loans, and business term loans.
The criteria for being a loan guarantor varies, but in most instances, you need to be at least 21 years old and have a stable income.
When you agree to be someone’s loan guarantor, you are essentially consenting to being responsible for the debt owed to the lender in the event your friend is unable to pay back the loan. In other words, you will be responsible for paying off the loan from then on.
If you too are unable to settle the debt or are habitually late with your payments, your credit rating will be affected, which is likely to hinder you from applying for loans in future.
Hence, being a guarantor is never as simple as putting your signature on a piece of paper. It is a serious and weighty commitment that may warrant legal advice.
After all, the consequences can be dire. If the borrower defaults on for instance, the business term loan, not only do you have to pay back the loan, but there is no guarantee that you will be able to recover the money from the borrower in future.
In fact, if the borrower defaulted on a couple of payments during the course of the loan, it will show up on your – the guarantor’s – credit history, and affect your loan eligibility.
The lender will also be hounding you for payment, and you may even have to fork out additional charges and costs if you are late with your payments.
You may even have to file for bankruptcy if you don’t have collateral that the bank can use to recover its losses – as if it were your own loan you are defaulting on.
If you are declared bankrupt, various restrictions will be placed on you. For example, you won’t be able to apply for a loan, set up your own business, or leave the country; and in most cases, you will experience difficulty finding employment.
If you are seriously considering being a loan guarantor, read through the loan documents carefully to make sure you understand them. Ask the lender to clarify any questions you may have. Here are some terms you may come across, and what they mean.
Concurrent remedies: It means the lender can either take action against you before he does so with the borrower, or take action against you and the borrower concurrently.
Continuing security: This means you need to pay off the borrower’s outstanding debts, along with future advances to the borrower – subject to the overall limit of the guarantee, as well as any charges the lender may impose. This will be valid until you are released from your obligations by the lender.
Payment on demand: This refers to the lender’s right to demand repayment from you, without needing to prove he sought to recover the sum from the borrower first. Hence, you would need to make payment when the lender demands it. So be very clear about how a lender may serve a demand.
Principal debtor clauses: This means you are liable to pay off the loan, just as if you had borrowed the sum yourself. In other words, even if the borrower is not liable, you are.
Restructuring: A lender may choose to restructure the loan at his discretion. However, this does not release you from your obligations as a guarantor.
Set off: The lender may extract funds from your savings account to set off against any sum due under the guarantee.
Subordination: You can only take action against the borrower after the lender has recovered the sum from him or her.
As you can see, there are a million and one things to consider – although you weren’t even the one who took up the business term loan to begin with.
But here are some things to take note of before you make your decision.
Since you are being asked to take on such a hefty responsibility, you have every right to ask the borrower for documents that will help you understand better what you are potentially getting into.
Obtain a copy of his or her credit report and loan documentation, and ask about details such as his or her income, existing debt, and financial obligations, as well as if there are any assets.
In addition, find out exactly why he or she needs a loan. What are the circumstances that led to it, and how will repayment be made? What is the loan tenor?
Once you have these details, you can then assess how high the risk of default is, and if you are willing to take the risk by becoming a guarantor.
If you are considering whether you should be a guarantor for an unsecured business term loan, it is only fair that you find out about the state of the borrower’s business.
What is the purpose of the business loan? Is it for working capital, business financing or project financing? How well is the business doing? What are its profits, if any? Will it be sustainable in the long run? Does it pay its staff, suppliers on time every month?
The borrower should supply you with relevant documents that provide a clear picture of the business’s financial health.
Sometimes, the need for a guarantor may be a sign that the bank is not confident in the borrower’s ability to repay the loan due to a lack of creditworthiness.
But at times, it may be because the borrower travels frequently or has a transferable job. Whatever the reason, it doesn’t hurt to ask the lender about why a guarantor is required.
Peruse the loan agreement carefully to fully understand what you are getting into.
Make sure you are clear about the amount you are acting as a guarantor for. Check also if the amount borrowed can be increased without your prior notice.
Ask the lender all the questions you need, and seek legal advice if necessary.
This means being aware of the situations in which the creditors will press you for payment. Do you come into the picture once the borrower misses an interest or principal payment?
When exactly will you be asked to repay the debt and how much do you have to pay? Is your liability limited to a specific or unlimited amount? Ask the lender when and how you will be notified to discharge your duty as a guarantor.
If you signed off on a “joint and several liability” arrangement, it means that the lender can pursue to make repayment – even if the borrower did not default. Worse, you may end up paying all amounts owed, even if there are other guarantors involved.
A mortgage or any money that the borrower has in his or her savings account can be used to set off against the amount owed on the loan. If there are indeed such forms of assets, you take on less risk as a guarantor.
Lastly, and perhaps most importantly, before you agree blindly to be the borrower’s guarantor, find out if you are in a position to accede to the request.
Ask yourself: If push comes to shove, am I ready to pay back this loan on his or her behalf?
If you are already saddled with considerable financial commitments, you should turn down the borrower politely but firmly to save you and your family the stress and trouble. There is absolutely no shame in saying no.
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Belinda loves thinking about random stuff, and collecting useless bits of facts and trivia. She often roots for the underdog, and believes the world needs more happy endings.
