In Singapore, there are some loans that require the borrower to find a guarantor willing to co-sign on the loan. These include housing loans, car loans, renovation loans and education loans.
If everything goes well, being a guarantor doesn't cost you anything. However, if there are arrears in payment, or if the borrower disappears, then there are tremendous financial and legal implications to you, as the guarantor.
In this article, we'll help you gain a better understanding of the responsibilities of a guarantor, so that you can make an informed decision whether to agree if you're asked by a friend or family member to be the guarantor for their loan.
WHAT DOES IT MEAN TO BE A GUARANTOR FOR SOMEONE ELSE'S LOAN?
By signing on to become a guarantor, you agree that you'll be responsible for repaying the loan, if the original borrower defaults.
This means that the creditor isn't even obligated to put in that much effort to chase the original borrower before making you completely liable for what is owed.
In addition to repaying the outstanding principal loan amount with interest, you'll also be liable for additional charges and legal fees levied when payment is delayed.
There may also be other responsibilities of a guarantor that would be specifically outlined in the loan contract, which you should examine in close detail. Some clauses could include the lender having the right to automatically deduct money from your savings account as part of the debt recovery, or having unlimited liability for the entire loan amount.
Interestingly, if the loan agreement specifies that the guarantor is jointly and severally liable for the loan, the bank can legally pursue you for the debt repayment, even if the borrower didn't default. This isn't likely to happen but is theoretically what the clause makes you liable for.
WHAT HAPPENS IF A GUARANTOR CAN'T AFFORD TO SETTLE THE BORROWER'S DEBT?
Once the borrower has defaulted, you'll be required to settle the outstanding debt. If you're not able to, it would be as if you've defaulted on your own loan obligations.
This will affect your credit score, which will hamper your ability to secure financing of your own in future, even after you successfully repaid the debt.
The bank could apply to the court for seizing your personal property of value and sold off (at fire sale prices) to recover what is owed.
Finally and most devastatingly, you could open yourself up to bankruptcy proceedings, which is a painful and life-altering process that has severe implications on your career prospects, your ability to travel overseas, or even running your own business.
HERE'S HOW YOU CAN PROTECT YOURSELF BEFORE BEING A GUARANTOR
Given the heavy responsibilities of a guarantor, and the severe consequences of the borrower defaulting, the decision to be guarantor should only be undertaken after serious consideration of 1) your own financial circumstances, 2) your assessment of the borrower's own ability and willingness to repay their own debt, and 3) careful reading of the loan agreement's terms and conditions.
If you're not in a financial position that you can be responsible for the loan, there should be no shame in letting your friend or family member know that you're unable to help.
As a prospective guarantor, it is also within your rights to ask the borrower for details of their existing financial obligations, credit history, assets, and income. You need to be able to assess the risk of default for yourself, and ask yourself if that is something you're comfortable with.
Finally, you should ask for the copy of the loan agreement and examine it carefully to understand what you'll be responsible for, and under what situations will trigger the creditors coming after you for the amount owed. Get clarification from the bank if you are unclear, and consider seeking advice from a lawyer if you're still not satisfied.
This article was first published in Dollars and Sense.