In some circumstances, you may consider being a guarantor of a loan in Singapore. These loans could be for a commercial property, commercial business, car, renovation and education. This article explores the things you need to know should you become a loan guarantor.
Why does a bank require you to be a loan guarantor?
After banks assess the loan application by an individual or a company, they may require you to be a loan guarantor. Holding the guarantor responsible and liable for the loan is a way to meet the bank requirements to approve the loan.
For individual loans, a guarantor might be required when the loan applicant profile is insufficient on its own merit, such as the applicant is a student or a fresh working adult.
For a company loan such as business term loan and SPRING loan, banks want to have a natural person linked to the company as a guarantor, such as the director, shareholder or even the next of kin. As a private limited company has limited liability, the guarantor provides the next level of assurance.
Monetary Authority of Singapore has disallowed the use of guarantor for Singapore residential loans. They require guarantors to be co-borrowers too, so they cannot be guarantors solely.
What does being a loan guarantor mean?
Basically, if the loan repayment goes sour, the bank providing the loan will come after the guarantor to make good, financially and legally. Yes, the guarantor is responsible for repaying the loan if the borrower (individual or company) defaults.
The guarantor cannot ensure or control the borrower’s repayment conduct. This increase the level of due diligence a guarantor should do on the borrower. Most often than not, a level of trust and vested interest are required.
The loan contract may stipulate the guarantor is jointly and severally liable for the loan. This technical term means the bank can pursue the guarantor for repayment even if the borrower has not defaulted. We think this may not occur but possible.
What happens when the guarantor cannot pay?
If this situation arises, the borrower has most likely defaulted on repayments for a period of time. Additional interest and late penalty fees would be incurred. Legal fees could be added on to the outstanding amount. These monies would be the responsibility of the guarantor now.
The bank could apply to the court for seizing the personal assets of the borrower and guarantor to recover the money owed.
If the guarantor does not settle the repayments, their credit score will be affected and future loan applications will be adversely affected.
Eventually, bankruptcy proceedings might be pursued by the bank.
How to protect yourself as a guarantor?
There are no sure-proof ways to ensure the borrower’s repayment conduct. No one can ensure the borrower will not default.
You should read and understand the loan contract and your obligations. Seek clarification from a lawyer if necessary. Having a clear understanding the consequences help you manage expectations. You may assess the borrower’s repayment ability now and future although the bank would have done their part already.