True friendships symbolize a firm bond between two individuals accompanied by a high trust level. We’re often helpful to friends who are in need. It seems better to become a loan guarantor rather than a friend’s lender because banks and financial institutions give them access to better financial products and services.
Most Singaporeans are quick to become loan guarantors for friends. Loan guarantors will pay for the loan’s entirety if the borrower defaults or goes missing. Guarantors are responsible for resolving the lender’s issues while handling the issue between them and the borrower separately.
If a borrower defaults or absents themselves, the individual to act as a guarantor will represent the borrower before lenders. The lender will send the guarantor official correspondence regarding the loan’s circumstances, including potential litigation and enormous penalties.
All loan guarantors who sign the loan agreement with the borrower and lender will face all issues concerning the loan’s default and absence. In a nutshell, the loan guarantor must pay the remaining loan balance and penalties. Additionally, if the borrower goes missing and faces litigation, the loan guarantor will handle all future legal payments during this event. Here is a complete list of guarantor responsibilities.
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.
If the guarantors pay the borrower’s remaining loan amount without delay, they can resolve the loan without negatively impacting their personal credit scores. 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.
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.
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, lenders will hold guarantors to full loan responsibility until the contract ends, and the latter has addressed all outstanding debts and penalties.
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.
Being a guarantor isn’t cut-and-dried, despite the helpfulness we derive from helping a friend or relative achieve loan application success. If someone asks to use your credit history, credit score, or credit report to supplement their poor standing, make sure you fully understand this new commitment. Even if they’re your friends, family, or most trusted friends, financial commitments outside your control that can pin you down will become enormous trouble in the future. Always check back on this list when someone asks you to act as a guarantor.
If you decide to become a guarantor, gauge your ability to be able to repay 100% of the loan if the borrower fails to pay it. You can easily determine this by asking the borrower for their planned loan amount and prospective banks, financial institutions, or moneylenders. Check the common monthly repayments, loan terms, and interest rates for the loan amount. If it goes beyond your financial capability, you have all the right to refuse to be a guarantor.
In simple terms, being a guarantor is taking on financing with a borrower. Instead of presenting collateral, the borrower presents you, the guarantor, as the collateral. Your value in the borrower and lender’s transaction is the safeguard who can pay the debt in their absence. Therefore, the borrower’s responsibilities are yours plus the added risk of poor financial management of someone else. Even if the borrower does well, and your credit history isn’t on the line, treat it as if you’re the one signing the loan contract and taking on all obligations even if you’re not paying.
To ensure your borrower will commit a criminal offense against you and ensure they’ll continue to pay the financing the best they can, you can create your own borrower-guarantor contract and notarize it. As a legally-binding document, borrowers will face all the consequences in your contract if they breach it. Plus, if the borrower breaches the contract, you can file a blotter preventing the borrower from leaving the country.
Most co-guarantor arrangements, which involve a primary and secondary guarantor, are common if you involve another family member or two to repay the loan. The combined credit history data of borrowers, guarantors, and co-guarantors allow banks and financial institutions to lower your risk grade and permit access to higher-amount loans. However, involving more people and someone else as collateral in any financing is a recipe for disaster, especially once the borrower defaults.
The worst has happened. Your trusted borrower did not finish paying their loan and does not answer your communication attempts. The lender has sent a correspondence that all responsibility to pay debts and other fees falls on you. Unfortunately, you have no cash to pay the minimum amount for two months, meaning you’ll automatically default on paying the financing. Here are two consequences you’ll face once it happens.
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.
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.
A great financial — and likely legal — advice before acting as a guarantor is to research the borrower’s financial stability and capacity to completely pay a particular financing amount. Put yourself in the lender’s shoes. In doing so, you can objectively figure out whether the borrower wishing to work with you won’t put you in hot water because they defaulted.
Remember, you’ll face all outstanding debt repayments, penalties, and possible litigation fees by agreeing to become a guarantor. If you have to say no to becoming a guarantor, you can refer the borrower to work with licensed moneylenders, such as A1 Credit.
We do not ask borrowers for collateral. A1 Credit Solutions invests in a borrower’s income stability and character. We will perform credit inquiries that can impact a borrower’s credit score, but the latter does not play any role in our loan application process. You can get your loan amount the same day you submit all your requirements. Visit our website today to learn more about our products and services.