A guarantor refers to someone who agrees to pay off another person’s loan in case the borrower defaults on that loan. If you agree to be a guarantor, lenders can come after your assets and sell them off to recover their money instead.
Several Reasons Exist for Why Someone would Need you to be a Loan Guarantor:
1. Age that is Outside the Limits Set
If loan applicants have not reached the minimum age limit that the lender requires of its loan applicants, they may need a guarantor. Depending on the financial institution that is giving the loan, this minimum age limit could be 18-21 years. Education loans usually require a family member to guarantee loans due to the young age of the borrower.
Lenders may also require a guarantor if the loan applicant is older and is near the retirement age. In many cases, this maximum age limit is anywhere from 62-65 years of age.
2. Lack of Valuable Assets
Most lenders will require assets as security for huge loans. But if the borrowers don’t have valuable assets, then guarantors may be needed to pledge their own assets as security.
3. Lack of Enough Income
Some lenders prefer to look at the income of the borrower. If the loan applicants don’t have the minimum income required to qualify for a loan, however, guarantors may be needed. They will then agree to pledge their income as security in case the borrower defaults.
4. Negative Credit History
Some borrowers may have a negative credit history due to poor financial decisions they made in the past. But lenders may consider them too much of a risk to give money to so they may require a guarantor.
Before You Agree: What to Look Out For
If you agree to guarantee someone, you will need to pledge your assets or your income against someone else’s loans. That’s why you should not agree to anything blindly.
Here’s what you should look out for:
1. Are You Able and Willing to Pay the Loan Amount?
Before you agree to be a guarantor, ask yourself: do you have enough income to pay off the remainder of the debt? And are you willing to lose your valuable assets to cover a debt that someone else incurred?
If the answer is no to both questions, then think twice.
2. How Likely is it that the Borrower will be Able to Repay the Loan?
Will the borrower who asks you to be a guarantor be able to repay the loan?
Think about the kind of person that borrower is. Are they financially responsible or do they have the habit of not paying off people’s debts? Ask to see the credit report. Then find out if the borrower in question has a good job whose salary can cover the loan amount.
If the debt you are asked to guarantee is a business loan, ask to see the business records. Determine if the business has a solid product or service with a market.
Also, watch out for other existing business debt. And look into the business assets to determine if they are valuable enough to generate the money required to pay off the debts if the borrower defaults.
3. What Other Circumstances would Trigger an Obligation to Pay?
Even if the borrower doesn’t deliberately default on their loans, some situations may cause the lender to come after you for the remainder of the debt. These circumstances include:
- Breach of loan contract
- Changes to the borrower’s financial situation – e.g. when the borrower loses their job
This is where it pays to read the fine print. The loan agreement you sign as a guarantor may allow the lender to come after you even before pursuing the borrower.
And if you a designated as being jointly liable for the debt (quite common for Singapore mortgages), the creditor can come after you for debt repayment even if the actual borrower did not default.
4. What are the Consequences If You are Unable to Pay when the Lender Seeks to Recover from you?
If You Guarantee Someone’s Loan and Fail to Pay the Debt, You will Suffer the Consequences of Doing So. These include the following:
a. Your Credit Score May Suffer
Being unable to pay off the debt you guarantee will affect your credit history. Your credit score will suffer. And you will have problems getting credit in the future since lenders will consider you a bad risk.
b. You Will Lose Your Assets
If you pledge your personal assets as security to guarantee a loan, then the lender can seize those assets. They can then be sold to recover the remainder of the debt.
c. Your Salary Will be Deducted
If you agree to be a guarantor and offer your income as security on behalf of a borrower, then prepare to lose some of that money. The creditor can obtain an order to garnish your salary automatically each month until the debt is paid off.
d.You May be Declared Bankrupt
Creditors can file to declare you bankrupt if you don’t pay off your debts as a guarantor. This would imply that you are in breach of a contract with them. You will then be legally obligated to pay off the debts. Additional consequences of being declared bankrupt include:
- Travel limitations especially if you want to travel overseas
- Restrictions on managing a business
- Difficulties finding a job
- A negative credit report
- Problems finding additional credit
5. Can You Sue the Borrower to Recover the Debt from Them?
As a guarantor you could attempt to sue the borrower to recover the debt from them. But there is no guarantee that you would be successful in doing so.
If a borrower defaults because they have no money to pay off the lender, how are they going to pay you? You may also be forced to wait for the lender to settle their debts first. And you may get nothing afterwards.
6. Is the Borrower a Limited Company of which You are the Main Shareholder/Director?
Limited companies usually have limited liability. They can declare insolvency and the shareholders will be unaffected. That’s why financial institutions prefer that a person linked to the company acts as a guarantor if the borrower is a limited company.
You could get around this by creating a Singapore holding company to act as a guarantor. This would exclude you from personal liability. But there is no guarantee that the lender would accept this.
What Is The Impact Of Being A Guarantor?
Being a guarantor would have no impact on you if the borrower does not breach any contract or default on the loan. However, if anything happens and the lender pursues you, you may:
- Lose money
- Get declared bankrupt
- Lose assets
- Get your credit history tarnished
- Experience a damaged relationship with the borrower
How You Can Protect Yourself as a Guarantor
If you choose to act as a loan guarantor, make sure you protect yourself. Read the fine print and seek clarification. And have a lawyer review your loan agreement and negotiate better terms on your behalf.
Think very carefully before committing yourself as a loan guarantor. Remember that your income or assets could be at risk if the borrower you guarantee fails to pay. And the lender could institute a bankruptcy filing against you. Also, your credit scores could suffer thus preventing you from accessing credit in the future. So, seek other alternatives for your loved ones who need credit.