In Singapore’s financial system, guarantors are often needed for loans like education loans for younger borrowers or business loans lacking collateral. Foreigners taking car loans may also need guarantors due to higher default risks. Some loan agreements allow lenders to pursue guarantors even without missed payments.
Being a guarantor means agreeing to take responsibility for another person’s loan if they can’t repay. This provides lenders with added security, making it easier for borrowers to access loans, especially in higher-risk cases.
In this article, you’ll discover the legal responsibilities, risks, and requirements of becoming a loan guarantor in Singapore, along with practical advice on how to protect yourself if you choose to take on this role.
What is a Loan Guarantor?
A loan guarantor is an individual who agrees to take on the responsibility of repaying a borrower’s loan if the borrower fails to do so. Essentially, the guarantor serves as a backup, offering the lender reassurance that the loan will be repaid even if the original borrower defaults. This role is not to be taken lightly, as it places a significant financial obligation on the guarantor.
Loan Guarantor’s Responsibilities
As a guarantor, you are agreeing to more than just a signature—you’re committing to taking over the loan if the borrower cannot fulfill their obligation. Below are the key responsibilities every guarantor should be aware of before signing the agreement.
1. They Will Pay The Loan Upon the Borrower’s Default
Loan guarantor responsibilities come to full light once the lender confirms the borrower’s default, usually 2-3 months of the latter failing to pay the minimum loan amount with increasing penalties. The guarantor’s responsibility and expenses are proportionate to the loan amount, remaining loan repayments, and penalties.
Here are circumstances that might trigger an obligation to pay, according to legal experts from Singapore Legal Advice:
- Minor breaches of the loan terms
- Changes in the borrower’s personal circumstances
Note that borrowers and guarantors are often designated as jointly and severally liable, meaning the guarantor may be required to pay even if the borrower hasn’t defaulted yet.
2. They Will Handle All Lender Impositions as If They are The Borrower
If the guarantors pay the borrower’s remaining loan amount without delay, they can resolve the loan without negatively impacting their personal credit report. However, if they delay the loan’s payment and further balloon the amount, it will affect their credit score and bank financing opportunities in the future. This outcome will have a lasting impact that spans years until the guarantor improves their scores.
3. Will Incur All Due Diligence Accompanying Delayed Payments
Once the lender declares the borrower had defaulted or declared bankruptcy (in any business loan’s case), the guarantor will face all due diligence accompanying delayed payments and penalties.
For example, suppose an adult son fails to pay the education loans under his name. In that case, the family member, parent, or guardian acting as a guarantor will address all the remaining payments plus penalties and delayed payments with compound interests. At this point, the guarantor assumes all loan agreement responsibilities as if they were the borrower.
4. Liable for Outstanding Debts and Other Future Issues
Guarantor responsibilities can become much more complicated in case the loan involves collateral. Lenders will ask to collect the borrower’s collateral, but their absence makes the process impossible. The guarantor will have to supply the collateral’s cash equivalent or an equal-value property, which the lender must determine eligible and satisfactory to the loan contract’s requirements.
Furthermore, legal experts shared that lenders will hold guarantors to full loan responsibility until the contract ends, and the latter has addressed all outstanding debts and penalties.
5. Responsible For All Litigation In The Absence of the Borrower
If the borrowers committed any action that moneylenders or financial institutions can file a lawsuit against them, the guarantor would represent them. Additionally, the guarantor will face and address all consequences, including paying both sides’ litigation fees if the borrower’s actions prove punishable.
If the borrower is present, the guarantor will only supply aid within the limits that both borrower and guarantor discuss, such as the guarantor paying for the outstanding debts and penalties and borrowers shouldering the litigation fees.
Risks and Consequences of Being a Loan Guarantor
Becoming a loan guarantor involves significant risks that can impact your financial standing, credit score, and personal assets. Below are some of the major consequences a guarantor might face if the borrower defaults:
- Seizure of personal assets: If the borrower fails to repay the loan, the lender can seize the guarantor’s personal property to cover the outstanding debt. This could include savings, investments, or other assets.
- Long-term negative your credit score: As a guarantor, you’ll face the full brunt of liabilities the borrower did not address. If you fail to address it, you face the same consequences, too, such as a long-lasting negative effect on your credit score. Any guarantor with previously exceptional credit will face an immense drop.
- Potential bankruptcy: If the outstanding loan amount is substantial and the guarantor is unable to repay it, they may face bankruptcy. Being declared bankrupt can lead to severe consequences, such as difficulty finding employment, restrictions on travel, and the long-term inability to access credit.
- Difficulty Borrowing From Banks In The Future: With poor credit scores, it will be challenging for guarantors to apply for financing in the future. You can spare yourself from this difficulty by ensuring the borrower you’ll work with is of good credit standing and financial capacity.
- Strained relationships: Beyond the financial implications, the emotional toll of having to cover someone else’s debt can be significant, especially if the borrower is a close friend or family member. It can lead to strained personal relationships and feelings of resentment.
In short, the risks of being a loan guarantor extend far beyond the initial financial obligation, making it critical to weigh these consequences carefully before committing to such a responsibility.
Can a Guarantor Withdraw Their Guarantee in Singapore?
In most cases, a guarantor cannot simply withdraw from their guarantee obligations once the loan agreement is signed, unless specific terms allow it or the lender agrees to release the guarantor. If a guarantor wishes to be released, it typically involves repaying the outstanding loan or finding an alternative guarantor.
To ensure these legal responsibilities are clear, it’s crucial for guarantors to fully understand the terms of the loan agreement and seek legal advice before committing to being a guarantor.
How to Protect Yourself as a Loan Guarantor
While being a guarantor carries substantial risks, there are steps you can take to protect yourself and minimize potential financial burdens. Here are some key ways to mitigate those risks:
- Monitor the borrower’s repayments: Stay informed about the borrower’s repayment status. By keeping an eye on the payments, you can avoid being blindsided if they begin to miss installments, giving you time to act before the situation escalates.
- Review the loan agreement carefully: Ensure you fully understand all terms and obligations in the loan contract. Look for clauses about how and when you might be held liable, as well as any conditions that may allow the lender to pursue you for payment.
- Consider limiting your liability: Where possible, negotiate terms to limit your liability. For example, you can request that your guarantee only applies to a specific portion of the loan or seek an agreement where you are released from the guarantee after a set period or under specific conditions.
- Ask questions to clarify all terms: Don’t hesitate to ask the lender for clarification on any aspect of the agreement that seems unclear. This includes repayment terms, possible loan restructurings, and situations that might affect your liability as a guarantor.
Releasing a Guarantor from Their Obligations
There are specific circumstances under which a loan guarantor can be released from their role before the loan is fully repaid. These circumstances depend on the terms of the loan agreement and certain legal provisions:
- Revocation of specific and continuing guarantees: In some cases, a guarantor can revoke their guarantee before the full loan amount is repaid. For unilateral guarantees, there are two types: specific and continuing.
- A specific guarantee covers a singular transaction, while a continuing guarantee applies to future transactions. A guarantor may revoke a continuing guarantee for future obligations by providing notice to the creditor, as long as no clause in the agreement prohibits such revocation.
- Death or insanity of the guarantor: If a guarantor passes away or is declared legally insane, their guarantee may be automatically revoked. This applies particularly to continuing guarantees, where the guarantor’s estate would no longer be liable for future obligations after their death or incapacity.
How to Withdraw Guarantor Obligations
The process for terminating a guarantor’s obligations typically involves formal communication with the lender. In most cases, the guarantor or their legal representative must give notice in writing to the creditor. The lender may require a new guarantor or an alternative form of security before agreeing to release the original guarantor.
It’s essential to note that many loan agreements include clauses that restrict or completely prevent the revocation of the guarantee. In such cases, the guarantor may need to negotiate terms with the lender or settle the outstanding loan amount to be released from their obligations.
Before making any decisions regarding the revocation of a guarantee, guarantors should consult with legal counsel to fully understand the implications and the steps required for a smooth transition.
Closing
Becoming a loan guarantor comes with significant responsibilities and risks, making it essential to fully understand your obligations. By carefully reviewing loan agreements, monitoring repayments, and seeking legal advice, guarantors can better protect themselves from financial burdens. Ultimately, understanding these legal and financial risks allows you to make informed decisions before committing to a loan guarantee.
Key takeaways:
- As a guarantor, you’re responsible for repaying the loan if the borrower defaults, including any accrued interest and fees.
- Missed payments by the borrower can harm your credit, making future loans harder to obtain.
- Guarantors cannot easily withdraw from their obligations unless specific clauses allow it. Always review the loan agreement thoroughly and seek legal advice to understand the potential long-term commitments and liabilities.
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