Should I Be A Guarantor For A Loan From Moneylenders?
Since licensed lenders are in the money lending business to both businesses and individuals. Therefore, when they offer loans, they have to be very certain that the borrower will repay the loan.
However, the reality is that each time moneylenders offer to loan money, they risk losing the money. The reason being that it is hard to predict the future. They might offer a loan to a business or an individual today, and the business fails or the individual loses his job.
Apart from looking at the credit report, moneylenders will insist that the individual in need of a personal or business loan provide surety/guarantor for the personal loan. A guarantor is held liable in case the primary borrower defaults. This is especially the case when a borrower has a bad credit history or low credit score.
Who Then Is a Guarantor
If I may ask, what is a guarantor and which role can one play? A guarantor is a third party who commits to repay the amount borrowed together with interest even when the borrower loses his job or is bankrupt or when the business fails.
As soon as you agree to become a guarantor, it may be difficult to later change your mind. For this reason, carefully think of the following issues before you agree to be a guarantor.
Types of Surety
1. Personal Surety
It is when the individual getting a personal loan takes complete responsibility for repaying their loan. A guarantor is not needed in this regard.
2. Third-party Surety
It is when the individual taking out a personal or business loan finds either a relative or friend who accepts to take full responsibility for the settlement of the outstanding debt. The person agreeing to take responsibility is the guarantor.
The borrower raises enough collateral/property such that in case he is unable to pay the loan back, the property may be sold to help raise the cash plus interest accrued. A borrower with poor credit history is more likely collateral to a loan, though even those with established credit may also be required to do that in some cases. Before making financial decisions, such as guaranteed loans, it would help to do due diligence on the borrower and the lender. This can help you avoid bankruptcy proceedings by making appropriate decisions.
Key Things to Consider
Before you accept to become a guarantor for a friend, please ensure that:
- You fully understand the responsibilities you take on as a guarantor.
- You receive a copy of the Loan Contract as of when the personal loan is given. This is very important for a bank guarantor. Make sure that you maintain a record. Also always keep secure copies of the loan contract you signed as your surety. Also, make sure that you monitor the loan repayment as well as correspondence.
- Make sure that the agreement states the loan amount and a clause that indicates that the funds and interest is effective only for the period of the loan.
- As a loan guarantor, ensure the moneylender has clarified the terms stated in the Contract in simple language that you will understand.
- Ensure that the moneylender does not hold onto your NRIC card and any other private ID documents (for example passport, driver’s license).
- Ensure that the lender does not get any info that has your user accounts passwords (e.g. email account, internet banking account, Singpass account).
Possible Effects of Becoming a Guarantor
If for any reason a borrower does not pay back the loan, as his guarantor, here are the possible effects:
- Settling the loan requirements
- Paying the legal fees and other duties incurred
- Having to pay late charges
- Also, remember the outstanding debt will be included in your rating as a bad debtor for both the loan guarantor and the borrower.
How you can Protect Yourself as a Guarantor
Ahead of signing up as a guarantor, below are several ways that you can use to protect yourself:
Request for the lender’s signed document stating that you will not be expected of you to pay the loan only until that time when the original borrower is not able to pay back the personal loan
Request for a signed agreement which only makes you liable only for the existing principal. Otherwise, even your savings account can be drained.
As soon as the personal loan has been given, make sure that you keep track of the repayment responsibility of your relative/friend.
1. Get a Lawyer
Accepting to become a guarantor to a borrower is a big responsibility and comes with very real risks such as having to pay back the whole loan together with interest.
Loan contracts are often drafted to enable the lender to easily force you to repay them – these have many clauses that are aimed at making it very hard for either the borrower or guarantor to resist paying.
Since the decision to be a loan guarantor is critical, you should always consider having a lawyer reevaluate the contract for the loans that you are being asked to act as a guarantor for. Even though the lawyer will likely not be able to assist you to request for a better loan agreement because you can lose a lot in case a borrower defaults.
They, however, can at least advise you on the actual meaning of what you will be signing up for. With such knowledge, you will be able to make a well-informed decision pertaining to the magnitude of risks that you will be liable for should the borrower fail to repay the loan taken.
2. Check on The Agreement Details
If for some reason a lender shows some reluctance to let you get a copy of the loan agreement draft to get legal advice. It should act as a warning signal around the properness of the entire arrangement.
Even after you have made sure that the moneylender is legally registered as an authorized moneylender. You need to think twice about whether to go through with the personal loan and also advise your friend/ relative the same. When you are in doubt, always talk to a lawyer, especially if you understand a guarantor meaning.
Additionally, note that loan agreements frequently do not have provisions that necessitate a lender to attempt to get payment from a borrower first before asking for payment from their guarantor.
Oftentimes, the guarantor and borrower are both also expressly designated as jointly being and respectively liable for the loan taken.
When this is the case, it then implies that a lender can decide to follow either the primary borrower or the loan guarantor, if not both parties for the repayment. That is, it is an option.
In this scenario, consider the possibility of the lender choosing to follow you for the repayment. This is even when the loan recipient has not failed to make payments as required.
Being a guarantor for a loan has consequences. Before you accept to become a guarantor for a family member or friend, make sure that you fully understand the responsibilities you take on.
Although there are several ways that you can use to protect yourself, always make sure you seek a lawyer’s counsel. however, become a guarantor on loan only when it is absolutely necessary.
Do be overconfident about the person you intend to guarantee because there are cases where even a company loan has defaulted. The point is, the guarantor suffers in case a borrower defaults.