Have you been asked by a friend of a family member to be their loan guarantor? And, if it’s your first time becoming a loan guarantor, you might be wondering what it means?
You might consider it as easy as it sounds to be. But, did you know to be a loan guarantor is a risk? This article can enlighten you on what it means to be a loan guarantor in Singapore.
In the end, we want to help you create a smart decision when you’ll be asked to be a loan guarantor.
What does being a guarantor for a loan in Singapore mean?
In Singapore, there are types of loans that need to have a guarantor, and these are home loans, car loans, education loans, business loans, and more. But, what it means to be a loan guarantor?
A loan guarantor acts in the stead of a principal borrower, promising to pay off the debt if the principal borrower fails to repay the loan. A guarantor is usually a close friend or relative who has better credit standing than the principal borrower. With a guarantor, the interest rates are lower than those applied to a single borrower.
However, you must understand the implications of becoming a loan guarantor. As a co-signer, you agree to the loan terms. As a loan guarantor, you agree that if the borrower fails to make the repayment, you will be the one to bear the consequence. But, if a borrower ends up repaying the loan successfully, you have nothing to worry about.
What are the Responsibilities of a Loan Guarantor?
You will be responsible for repaying the loan if the principal borrower fails to repay it.
First, loan guarantors are people who agree to be liable for someone else’s repayment of the loan even if the latter fails to make a repayment on the agreed amount.
Being a co-borrower is not just a mere formality anymore to assist the borrower the co-borrower is also legally responsible for the full repayment of the loan.
You will be liable for late interest and legal charges.
If the borrower fails to repay the loan, you’ll end up not only paying the principal amount, interest charges with the late interest charges.
The worst-case scenario that you can ever face as a loan guarantor is that you’ll end up facing legal charges if you also failed to repay.
And, you can’t immediately ask the borrower for repayment. You will need to settle first with the lender before taking action with the borrower.
You need to check the borrower’s credit history.
Another responsibility of the loan guarantor would be to check on the borrower’s credit history. The guarantor must be able to review the details of the credit report and determine whether or not the borrower can repay the loan according to the agreement. There are different reasons why people have bad credit ratings. Some have defaulted on loans; others have arrears in their accounts; while others may have committed fraud or breach of contract. All these factors are taken into consideration when the credit history is being reviewed.
The guarantor needs to ensure that the agreement is followed by both parties
The duty of the loan guarantor in a debt agreement does not stop there. The guarantors must ensure that the agreement is followed by both the parties involved. The parties involved in a debt agreement include the borrowers and the lenders.
If the agreement is not properly followed by either party, both parties have to go through legal procedures to settle the dispute.
What if a borrower can’t repay the loan?
Your credit score can be affected.
The main risk you are taking when you become a loan guarantor is that your credit score can be affected. In most cases, it is difficult to raise your credit scores by doing anything. You can increase your credit scores by paying your debts promptly and by not missing any of your scheduled repayments. But once you have guaranteed a loan, you might not have enough time to improve your credit scores in time.
You’ll end up facing legal charges.
As a loan guarantor, you’ll end up facing legal charges when the borrower failed to repay. And. this can affect your credibility. You’ll also end up taking money out of your pocket to pay for the charges. Dealing with legal charges can also be stressful.
It can affect your capability of getting a loan.
As the borrower failed to repay the loan it can negatively affect your credit score. If this happens, you may end up having difficulty when getting a loan, especially from banks.
You may end up with a broken relationship with a borrower.
When becoming a loan guarantor ends up facing legal charges, it may also imply having a broken relationship with the borrower. It can be the reason for a ruined relationship, it may hard to accept, but it can compromise your financial stability.
Can a guarantor sue borrower in Singapore?
If you are a loan guarantor in Singapore, you need to settle first with the lender before taking action against the borrower.
What if You Decide to Become a Loan Guarantor? What’s next?
Make sure that you understand the loan agreement.
When you decide to go ahead with a loan guarantor agreement, ensure that all the responsibilities and obligations have been clearly stated in the document.
Also, take note of the consequences you will face should your co-signer fail to comply with the agreement. For example, if he or she were to skip payments, you may have to sell your house or other properties.
Make sure to get the agreement recorded and keep a record of all the necessary documents. You must obtain a personal copy of the loan agreement.
How to Protect Yourself from Being a Loan Guarantor?
Here are some simple ways you can follow to protect yourself when becoming a loan guarantor.
- Assess the borrower’s capacity to pay. You need to check if how is he or she going to pay the loan.
- You also need to assess yourself if you can repay. Check yourself if you have the willingness to pay when it comes to someone else loan.
- You must consult with a lawyer if everything is unclear with the agreement.
- Always think it over before becoming a loan guarantor. Make sure that you are 100% prepared for the responsibility of a loan guarantor.
- Once you have decided to be a loan guarantor, make sure that you read carefully and understood the loan agreement. Always get clarification from the lender or the bank when something is unclear.
In the end, we know that your sole purpose of becoming a loan guarantor is to help a family member or friend who is in need.
Standing s a loan guarantor can able to help them successfully take out a loan. However, as mentioned above, there are responsibilities and liabilities associated with becoming a loan guarantor.
Before signing any loan agreement, you have to make sure that you have understood your responsibilities.