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You may have faced situations where a family member or friend asked for your help as a loan guarantor. Banks usually require borrowers to get a loan guarantor if the borrower does not meet the car loan (or housing loan) approval criteria or is categorized as high-risk.
5 Important Things to Consider Before Becoming a Loan Guarantor
We would definitely feel trapped or conflicted when asked to be a loan guarantor, especially by someone who has a family relationship with us. It is important for you to know the important things related to loan guarantees before signing any bank loan form.
If possible, refuse the request in a polite manner or create a reasonable excuse. This approach can help you avoid being burdened with debt obligations if the borrower fails to repay the loan. However, if it cannot be avoided, consider the following aspects before agreeing to be a loan guarantor.
1. Know Your Purpose
Do your research before putting your name as a loan guarantor. Identify the reason for the loan and examine whether the borrower is capable of repaying the loan.
Ask for detailed information regarding the loan application. If you feel that something is not right, do not hesitate to speak up and refuse this request.
2. Consider Your Ability to Repay the Loan
In addition, you should also consider your own ability to repay the loan. Conduct a comprehensive analysis of your financial situation and capabilities first.
Take into account the situation if the borrower fails to repay the loan. If this happens, it will be your responsibility to settle the outstanding loan and any additional costs that may arise.
3. Check the Loan Agreement Contract
Examine each clause stated in the loan agreement contract. Many guarantors take this lightly. If necessary, seek legal advice to ensure that you understand your rights and risks as a guarantor.
In addition, you can also prepare a signed indemnity letter from the borrower as a backup plan. With this letter, you can take legal action for any losses you may suffer if the borrower fails to repay the loan as scheduled.
4. Don’t Sign Blank Documents
Do not sign any loan documents in a hurry. Also, avoid signing blank documents that have not been filled out, and only sign loan documents that have been filled out by the borrower.
Make sure that the loan amount, interest rate, and contract term are clearly stated. This is to ensure that you are not agreeing to different terms and conditions.
5. Know the Risks, Impact on Credit Score
Even if you intend to help a friend or family member, make sure that this action will not hurt you. Also consider your credit record such as CCRIS and CTOS reports, or the impact on your credit position if you become a guarantor.
You need to know that if the borrower fails to repay the loan, you as the guarantor will be responsible for settling the debt. If you are unable to settle the arrears, your credit report in CCRIS may be affected.
5 Loan Guarantor Risks You Need to Know
A loan guarantor is usually required when a potential borrower has a poor credit score or their income does not meet the application requirements. This is because, when the borrower is unable to repay the loan, the guarantor is among the people who will be sought by the bank. Therefore, it is not surprising that becoming a loan guarantor carries high risks.
1. Assets Can Be Seized
According to the Insolvency Department, an individual can be declared bankrupt through a court order. Creditors can file for bankruptcy against a debtor if the amount of debt reaches RM100,000.
If this situation occurs, the Insolvency Department can seize the assets owned by the borrower and the loan guarantor to pay off the debt.
2. Credit Score Can Be Affected
Basically, in certain cases, banks require a guarantor as collateral for loans provided. In simple terms, if the borrower defaults or fails to repay the loan, the bank will look for the guarantor to settle the debt on behalf of the borrower.
If you, as the guarantor, are unable to repay the loan, your credit score is at risk of being affected. When your credit score is poor, it may make it difficult for you to obtain future loans.
3. Can Be Declared Bankrupt
As explained above, if the borrower is unable to repay the loan as scheduled, the responsibility to settle the debt falls on the guarantor.
If you are able to repay the loan on behalf of the borrower, it is not a problem. However, if you are unable to repay the loan, you are at risk of being declared bankrupt.
4. Career Can Be Stalled
In addition, the borrower’s failure to repay the loan can also indirectly affect you. Assuming the borrower fails to settle the debt and you are declared bankrupt, it may affect your career.
Inadvertently, there is no employer who wants to hire you because of the record you have. Moreover, it can also have other effects, such as you not being able to own a business or own a part of a business.
5. Can Be Barred from Leaving the Country
Individuals who have outstanding debts or unpaid debts are usually blacklisted in the immigration restriction list. This, in turn, prevents you from leaving the country. This means you cannot go on vacation overseas until your name is removed from the blacklist.
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