Should You Be A Loan Guarantor For Your Friends And Family?
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In Malaysia, a guarantor plays a crucial role in the borrowing process. They are essentially responsible for assuring the bank or financial institution that someone will repay the loan if the borrower disappears.
Specific to Malaysia, banks have the right to demand repayment from both the guarantor and borrower simultaneously. They are not obligated to pursue repayment from the borrower first before approaching the guarantor. However, banks will generally try their best to recover the loan from the borrower first.
Who can be a guarantor?
Guarantors are generally divided into two types: social guarantors and non-social guarantors. A social guarantor typically takes on the responsibility without expecting any financial gain. They are often the family or friend of the borrower who wants to help them out in a non-profit context. They can be guarantors for an education loan, or personal car and housing loan. Under the Insolvency Act 1967 section 5(3), social guarantors will enjoy immunity from all creditors bankruptcy actions.
On the other hand, non-social guarantors will guarantee a loan for a profit-driven reason. These will likely be related to a commercial or business loan. For example, if a company director personally guarantees a loan taken by the company, this falls in the category of non-social guarantor. The new Insolvency Act 1967 also provides non-social guarantors with additional protection. However, they do not enjoy immunity from bankruptcy actions taken by creditors.
Not everyone can be a loan guarantor. Banks and financial institutions will often have certain criteria that you must meet if you intend to become one. These can include:
- Must be 18-years old or above
- Must clearly understand their responsibilities
- Must voluntarily agree to the role without any form of pressure or deception
- Should not be in a state of bankruptcy
Why would you need a loan guarantor
Here are a few reasons as to why someone would need to get a loan guarantor:
No credit history
It is much harder to obtain a loan if your credit history is lacking. This is especially common among younger individuals, especially those who come from overseas to work.
Recently started a new job
Bankers tend to prefer handing out loans to those with stable employment as it translates to stable income. This makes them less inclined to approve the loans of those who have recently changed jobs and don’t have the prerequisite three months salary slip available yet.
Low income
Individuals with low income may not be able to meet the requirements set by the bank or financial institution. A guarantor with higher and more stable income would be required under such circumstances.
Poor credit score
People with low credit scores are unlikely to get their loan application approved, as the banks cannot trust them with repaying their debts on time. A guarantor can help to alleviate some of the risks associated with approaching such loans.
Financial commitments
Certain financial obligations such as renting properties, securing personal or business loans, financing a car, or obtaining a mortgage may require a guarantor. This is especially true if the loan amount is substantial.
Advantages and disadvantages of being a loan guarantor
| Advantages | Disadvantages |
|---|---|
| Helps borrowers obtain a loan by providing financial institutions with additional security. | The guarantor risks assuming debt responsibility should the borrower fail to repay what they owe on time. |
| Increased borrower’s potential loan amount as a guarantor can affect how much a bank is willing to lend. | The guarantor’s own credit score may take a hit should the borrower default. Under the most severe circumstances, the guarantor could face bankruptcy. |
| Improve the borrowers credit history by encouraging the borrower to consistently pay off their debts in a timely fashion. |
Your rights as a guarantor
According to this MyGov portal, here are your rights before and after you signed the agreement:
- Guarantors are eligible to have a copy of the signed contract or any related documents pertaining to the loan facility.
- Guarantors have the right to be briefed on the contract before signing the agreement.
- Guarantor is able to ask the borrower to settle the outstanding of his/her liability.
- Guarantors have the right to know the loan balance outstanding with the consent of the borrower.
Guarantor Principle
- Guarantors must understand the type of loan and understand the obligation as a guarantor before signing the agreement.
- Get legal advisory on the implications of being a Guarantor.
- Ensure that the agreement is not against the law.
Ask yourself these questions before you become a guarantor
Are you fully aware of the financial responsibilities involved with being a guarantor?
It cannot be stressed enough that you need to understand what you are getting yourself into if you plan to become a guarantor for someone else. It is crucial to assess if you are financially stable enough to handle the coming challenges.
Do you trust the borrower to fulfill repayment terms independently?
Be sure to fully evaluate your trust in the borrower and their ability to repay their loan on time. If the borrower has a shaky financial history or if you have doubts about their ability to make payments, then you should think twice about being their guarantor.
Do you understand the circumstances that require your intervention as a guarantor?
Once again, you have to be absolutely sure about the circumstances which will require you to step in and pay on behalf of your charge, as well as understanding when the lender might consider the borrower as having defaulted.
Are you prepared for the financial consequences of being a guarantor?
Being a guarantor comes with risks. It can negatively affect your credit score if you are not careful, thus affecting your ability to take loans in the future. You must also be aware that your financial obligations as a guarantor can last for some time.
