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5 Things to Watch for When Acting as a Loan Guarantor

Have you ever been approached by a relative or close friend and asked to act as loan guarantor? The scenario is typical for would-be borrowers that are required by lending institutions to produce a loan guarantor. That is a pre-condition for their loan application to be approved. Your natural instinct would be to oblige as a gesture of support. However, you should give it serious thought before signing on. There are dire consequences to being a loan guarantor in the event of non-payment of the debt.

Responsibilities of a loan guarantor

Let us put in perspective the real role of a loan guarantor. A loan guarantor is not a co-borrower. Being a co-borrower means you share equal responsibility with the principal borrower in the payment of the loan.

Banks or lending firms would require a guarantor if the amount of loan applied for by the borrower is above the prescribed limit. In some cases, there is misgiving on the ability of the borrower to sustain payments. Hence, another person is needed to guarantee the payment of the loan should the borrower default in paying the loan obligation. In essence, you become the fallback or second way out of the lender.

People with stable income and good credit standing are the acceptable loan guarantors. However, one shouldn’t feel honored or obligated when asked to act as loan guarantor. Instead, you have to think twice if you’re willing to assume the responsibility of paying for a debt that is not yours in the first place.

5 things to watch for when acting as a loan guarantor

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The issue of bankruptcy is prevalent in Malaysia. The number of delinquent borrowers below the age of 40 is growing over years. The failure to settle their auto loans, home mortgages and even personal loans are the principal reasons for the alarming trend.

Unfortunately, some of those ‘blacklisted’ or who belong to the delinquency bucket list are mere loan guarantors. Thus, it is important to be aware of the negative implications before you extend help to relatives or friends.

1. Ask the requesting party the purpose of the loan

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Ask the requesting party what is the purpose of the loan. It should be understood that any guaranteeing is for a worthy purpose. Do not hesitate to express your apprehensions and find out why they need a loan guarantor. From the details you gather, you can determine the probability of default. If you notice some red flags, just be straightforward and decline the request.   

2. Assess if you have the capacity to repay the loan in case of default

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If you feel comfortable that the risk of default is negligible, assess your own financial position. Be certain you have the capacity to repay the debt should the requesting party, in the remote possibility, default in the payment. Keep in mind that it will be an added expense on your part to pay for someone else’s loan.

3. Review the loan contract or agreement

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The crucial mistake of would-be loan guarantors is the failure to review the fine prints of the loan document or agreement. Review the details word for word if you have to. Seek legal advice to know the extent of your guaranty or liability. Do not rush into signing the contract unless all salient points are addressed.

As a precautionary measure, prepare a letter of indemnity for the borrower to sign. Allowing you to take legal action in case of default is a sign of good faith. Refusal to sign means the borrower has no sincere intentions.

4. Do not sign blank loan documents

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In the zeal to extend assistance, some would-be loan guarantors commit the biggest blunder of all. Signing ‘blank’ loan documents have to be avoided at all costs. Require the requesting party to show the completely filled-up loan documents.

The loan amount, interest rate, and contract period should be clearly stipulated. You’ll get the shock of your life when you discover you signed on for different terms and conditions.

5. Find out the impact on your CCRIS standing or credit record

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While it may be heart-breaking to reject a relative’s or friend’s request, it would be more agonizing to you if it impacts on your CCRIS standing. Keep in mind that the granting of the loan is anchored on your signature.

Thus, the moment you sign, you stick your neck out regardless of the outcome. You just have to carry the burden of paying in case of default to avoid embarrassment and have a negative record altogether.

Do not let emotions rule over your decision

The greatest setback of being a loan guarantor is that you’re liable to repay the loan in case of default. But that would also tarnish your creditworthiness. You run the risk of forfeiting your own credit privileges. Hence, do not let your emotions influence your decision. Be level-headed and protect yourself. It can’t be in hindsight later on. 

This article is prepared by Direct Lending – a fast, simple and safe online personal loan platform for civil servants and private workers in Malaysia

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