Having a guarantor is a requirement in a number of financial transactions in Singapore. Applying for education loans is one of them. You can also avail of a guarantor when you rent a place to pay for the security deposit.
But what does a guarantor do exactly? Find all the information and advice you need here.
What Is a Guarantor?
A guarantor is someone who binds him or herself to pay the loan in case the borrower defaults. They ensure that the money or credit extended by the lender will be repaid by pledging their own assets, like money or property. People usually ask someone close to them as a guarantor, such as the debtor’s parents or friends.
If a family member, friend, or colleague asks you to be a guarantor, such obligation should not be treated lightly. No matter how strong your bond or friendship with someone, taking financial responsibility for another’s liabilities is not a simple favour. It has serious implications that can affect your whole life.
Here is a list of the general duties and responsibilities of a guarantor:
- A loan guarantor steps into the shoes of an insolvent borrower by paying his debt.
- He guarantees the satisfaction of the loan by using his assets as collateral.
- He cannot claim any asset purchased by the borrower.
- Payment delays are attributed to the guarantor, who can be liable for further charges, legal costs and interest.
- Unless the creditor expressly releases him, he is liable for all outstanding debts and future advances.
- The lender may file a lawsuit to recover from the guarantor without filing a prior suit against the borrower.
Obligations of a Guarantor
If you’re planning to act as a guarantor for another person, it would be wise to know your potential obligations. The following are common stipulations that guarantors should carefully understand before guaranteeing a loan:
- Principal debtor clause
This clause indicates that in case the borrower defaults, the guarantor would take his place. Therefore, you will be liable as if you originally secured the loan.
- Payment on demand
Guarantors must pay any outstanding balance once the lender demands. Otherwise, late payment fees and penalties may accrue. A lender may demand payment regardless of proof of a prior claim from the borrower.
Guarantors are still bound under the agreement despite a unilateral restructuring of the loan by the lender.
- Continuing security
A continuing security clause obliges guarantors to secure all of the borrower’s outstanding debts and future advances unless otherwise provided under the arrangement with the lender.
A clause referring to subordination means that guarantors are second in line behind the creditor when recovering from the debtor.
- Concurrent remedies
This means that claims against guarantors may proceed despite no prior recovery initiated against the debtor. Additionally, a lender may also claim against you and the borrower simultaneously.
- Set off
This stipulation will allow lenders, with whom a guarantor has savings account with, to deduct the money in such accounts from the amounts due.
Things to Consider Before Agreeing to Become a Guarantor
- Are you able and willing to pay someone’s debt?
If asked to guarantee a loan, the two most crucial factors are your ability and willingness to pay what is stated in the loan contract. You might be willing to help out your family member or friend, but are you able to? Remember that by agreeing to be a guarantor, you promise to satisfy all the lender’s claims, unless otherwise limited in the agreement.Therefore, it is important to assess your financial situation as if you’re the debtor. Don’t assume the borrower’s obligations if it will leave you with few assets to yourself.
- How likely is it that the borrower will be able to repay the loan?
A guarantor must likewise evaluate the borrower’s financial situation. Look at all his current loans, credit history, and income streams. Ask for documents relating to these matters to make an informed decision.
Since the borrower is probably no stranger to you, you should also consider his personal habits. It would certainly be unwise to guarantee a debt of a habitual gambler no matter how strong your friendship is.
- Are you ready for the consequences if you are unable to pay?
There are many situations where lenders can demand payment from the guarantor. Therefore, being a guarantor is a risky financial move that not everyone should sign up for. If you don’t have enough assets to cover everything on behalf of the debtor, these are consequences you might face:
- It can lower your credit score.
- Your personal properties, besides your collateral, may be seized to satisfy the amounts due.
- You may be subjected to garnishment proceedings that will deduct certain amounts from your income periodically.
- Finally, you may become bankrupt.
- Can you sue the borrower to recover the debt from them?
You can recover from the debtor himself, subject to a subordination clause. However, the lender may collect the debt from you before it even goes to the borrower, if it has assessed that it would be harder to go after the debtor.
- Do you clearly understand the loan agreement with the moneylender?
Besides knowing the risks associated with your guarantor agreement, you also need to conduct due diligence on the loan agreement itself. Assess whether the interest rate vis-a-vis the repayment period is reasonable for you. It may seem tedious, but bear in mind the consequences of this decision.
What Happens If a Guarantor Can’t Settle the Borrower’s Debt?
- It will affect your credit score.
Failing to meet your obligations as a guarantor will reflect in your credit history. A low credit score, especially with banks, will hamper your ability to take out loans for yourself in the future.
- May be subject to bankruptcy proceedings, which has many consequences.
Being bankrupt carries a social stigma that many won’t be able to handle. However, it also imposes restrictions on leaving the country, being a director of a company, and securing meaningful employment. Furthermore, if you have existing contracts with other institutions, bankruptcy can be considered a breach of such agreements.
How Can You Protect Yourself Before Agreeing to Be a Loan Guarantor?
Now that you are aware of the duties and obligations as well as the consequences of failing to satisfy payments, you should consider the following points to protect yourself:
1. Your financial circumstances
Examine your financial position (for example, your income, savings and liabilities) to see whether you have the ability to pay not only the loan amount but also interests and fees. Ideally, the asset/s you want to pledge as collateral should be one you’re willing to lose. Therefore, be honest to your friend or family member if you can’t afford to take the risk.
2. Your own evaluation of the borrower’s ability to repay their own debt.
You need to conduct due diligence on the borrower as if you’re the lender. Ask for information regarding his assets, existing loans with other lenders, and credit history to see if you can handle the risks associated with his financial profile.
3. The terms and conditions of the loan agreement
Ask for a copy of the loan agreement to make your own assessment. Take note of the amounts you may pay and stipulations that the lender can exercise to collect from you.
Guaranteeing a debt is perhaps as difficult as incurring one. In case of default, it can cause a huge strain on your pockets and your relationship with the borrower.
Fortunately, there are many options in Singapore to take out loans without the requirement of a guarantor. With licensed moneylender like 1 Fullerton Credit, borrowers can take out a loan without a guarantor, but they have to make sure that they have the ability to repay the loan to avoid the consequences. We guarantee a quick application process and flexible and affordable loan plans to address your financial needs.