Have you ever been asked by a friend or family member to become a loan guarantor? Banks generally require borrowers to have a guarantor if they don’t meet the approval criteria for car or housing loans, or if they are categorised as high-risk for whatever reason.
Being asked to do so may cause you to feel trapped or conflicted, especially if the person doing the asking is someone who is close to you. That said, it’s important for you to know what you might be getting yourself into before agreeing to or signing anything.
Here are five things to consider before deciding whether or not to be a loan guarantor.
1. Determine your purpose
Do your research before agreeing. Identify the reason for the loan and examine whether the borrower is capable of repaying it.
Ask for detailed information regarding the loan application, do a background check on the borrower and, if you feel something is not right, don’t hesitate to speak up and refuse this request.
2. Consider your ability to repay
If the borrower fails to repay the loan, it will be your responsibility to settle the outstanding debt and any additional costs. As such, it is crucial for you to consider your own financial standing.
Conduct a comprehensive analysis of your financial situation and capabilities prior to agreeing or disagreeing to the borrower’s request.
3. Check the agreement contract
Examine each clause stated in the loan agreement. Many guarantors take this lightly. If necessary, seek legal advice to ensure you understand your rights and risks as a guarantor.
In addition, you can request for a signed indemnity letter from the borrower, with which you could take legal action for any losses you suffer should the borrower fail to repay the loan.
4. Don’t sign hastily
Do not sign any loan documents in a hurry, and especially avoid signing documents that have not been filled out.
It’s imperative to ensure the loan amount, interest rate, and contract clauses are clearly stated so you do not end up agreeing to different terms and conditions down the line.
5. Know how your credit score will be affected
Even if you intend to help your friend or family member, make sure this action will not hurt you. Consider your credit record such as CCRIS and CTOS reports, or the impact on your credit position if you become a guarantor.
Other risks
Again, a loan guarantor is usually required when a potential borrower has a poor credit score or their income does not meet the application requirements. It is, therefore, not surprising that becoming one carries high risks, as outlined below:
1. Seizure of assets
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 department could seize the assets from the borrower as well as the loan guarantor to pay off the debt.
2. Bankruptcy and career impact
Should the borrower fail to repay the loan and you find that you, too, are not able to fulfil your obligations as a guarantor, you are at risk of bankruptcy.
This will clearly have repercussions on your career as employers would not want to hire someone who has been declared insolvent, and you will not be able to own a business or part of a business.
3. Barred from leaving the country
Individuals who have outstanding debts or unpaid debts are usually on the list of immigration restrictions. This means you will not be able to leave Malaysia for any reason until you have been removed from the blacklist.
This article was written by Shafiq Wahab for Qoala Malaysia.