If you don’t meet one, a few or all of the requirements listed by loan providers, you can consider seeking the help of a family member or a close friend to guarantee the loan for you. This guide will take you through the ins and outs of guarantor loans, the benefits available to borrowers and how to avoid some common pitfalls.
A guarantor is a person who repays a debt on behalf of someone who cannot.
The amount you may borrow with a guarantor depends on the loan provider, the type of loan, and the guarantor’s financial situation, amongst other factors.
The responsibility of resolving the debt falls on the guarantor. If a guarantor cannot make repayments, the guarantor might see an impact on his/her credit score.
Being a guarantor involves taking on serious responsibilities. Always understand the finances of the person you are guaranteeing and get legal advice before making any commitments.
When you ask someone to guarantee your loan, you are asking them to take on your debt should you default on your loan. If you agree to go guarantor on someone’s loan, you become legally responsible for the debt if they become unable to manage their repayments.
If you are a guarantor and you apply for future credit of your own, you will need to list the guarantee on your application. You may also have put up an asset to guarantee someone’s loan, such as equity in your home or a car, and you will no longer be able to use that asset as your own collateral for credit.
Who might ask for a guarantor loan?
Guarantor loans are often used by individuals with bad credit or multiple loans. Alternatively, applicants might be below the legal age to get a personal loan or blacklisted. In such cases, these individuals have to rely on someone with a good credit score to secure their loans.
What personal loans allow a guarantor?
Not every personal loan is a “guarantor” personal loan; using a guarantor is an optional feature that applicants can take advantage of when they are not eligible on their own merits. You’ll generally have the following loans available to you:
Secured loans. If you’re looking to buy a car or you or your guarantor have an asset to use as collateral, a secured personal loan is an option for you. These loans come with more competitive interest rates because they are less of a risk to the lender. Keep in mind the additional risk the guarantor takes on if it is them offering up the asset as collateral.
Unsecured loans. More flexibility is on offer with an unsecured personal loan, and no asset is required from you or your guarantor. Variable or fixed rates are usually available for periods of between 1 and 7 years.
The amount you’re able to borrow depends on a number of different variables:
What type of loan are you applying for? Generally, personal loans come with set minimum and maximum amounts. If you are eligible for one of these loans when applying with a guarantor, you should be able to apply for any amount in this range.
What do you want to finance? If you are looking to purchase an asset such as a car, you may be restricted to borrowing the value of the vehicle. If you’re borrowing to take a holiday or something similar, lenders may not approve you for as high a loan amount as the loan is more of a risk to them.
What financial situation are you and your guarantor in? Your income, credit history and employment situation will help lenders determine your capacity to manage your repayments and their own risk of taking you on as a borrower. Similarly, your guarantor’s financial circumstances play a part in this risk level if you are unable to repay your loan and they become responsible for your repayments. The higher your determined risk, the lower the loan amount you’ll be approved for.
What lender are you applying with? Lenders have varying eligibility criteria, personal loan products and loan amounts available. Opt for a lender that offers you the loan amount you’re looking for to ensure you have a better chance of being approved for the loan you need.
Going guarantor? Consider the following before you say “yes”
I am confident that the person I’m guaranteeing can manage the loan repayments. This is up to you to do and may involve you seeking independent financial advice. In general, you should request to see the borrower’s credit report, and understand his/her outstanding loans. Besides this, guarantors supporting business-related loans should personally understand the fundamentals and financial health of the business involved.
I understand my liabilities. How much are you liable to pay and when can the lender request payments from you? Is your liability limited to a certain threshold or do you have to bear the full price of the loan? Additionally, if you are a co-guarantor, understand how the responsibility may be split between you and other guarantors.
I am confident that I can repay the loan amounts. As a guarantor, always prepare for the worst-case scenario and assume you may have to bear all costs related to the loan. If you are unable to repay the loan amounts, your credit score may be negatively impacted, which could affect your ability to borrow in the future. Additionally, defaults over $10,000 may result in bankruptcy proceedings. This would further affect your ability to apply for loans and travel abroad.
I have understood the interest terms. Interest on guarantor loans tends to be higher than that of personal loans, so take some time to understand how the provider calculates interest on such loans.
I understand the lender doesn’t have to proceed with enforcement against the borrower before taking legal action against me as a guarantor. You have no right to insist on this as a guarantor.
I understand the capacity of which I’m signing the guarantee. For instance, if you are a director, are you signing a personal guarantee? If you are part of a trust, is the guarantee limited to the trust assets?
I have read all the fine print involved. There is a good amount of paperwork that comes with agreeing to be a guarantor. Read all the paperwork involved and make sure you understand how going guarantor works before making any commitments.
I have received legal advice before agreeing to go guarantor. You can seek free legal advice before agreeing to be the guarantor on a personal loan. There are community legal centres and legal aid agencies available in Singapore.
Learn about and understand these important terms related to guarantor loans. These terms are all related to the obligations of a guarantor, so be sure to understand exactly what they mean since they will apply to you.
Principal debtor clause. A legal clause that makes you liable for repayments as though the debt were your own.
Concurrent remedies. This refers to the lender taking action against you before, or during, action taken against the original borrower.
Restructuring. The terms of the loan may be restructured at the fancy of the lender.
Payment on demand. The lender reserves the right to demand payment from you without proving that he/she has tried to recoup the money from the original borrower.
Subordination. This means that as guarantor, you cannot take legal action against the borrower until you resolve all payments with the lender.
Continuing security. As a guarantor, you will be liable for all costs related to the loan, known as continuing security, until you are released from your obligations by the loan provider.
How do I apply for a guarantor loan?
You may apply for a guarantor loan easily online. For your application, you will often be asked to provide:
Personal and financial details, including your name, address, income, existing loans and credit score.
Frequently asked questions about guarantor loans
In Singapore, you have to be at least 21 years old to get a loan from a bank.
You may sue the borrower. However, since the borrower does not have the finances to cover a loan repayment, it is likely that they will not be able to afford the amount you’re sueing for. This could result in a waste of time, money and effort on your part as the borrower might not be in the capacity to make any payments to you.
If you’re a co-borrower, you are listed on the loan as a borrower and are jointly liable for the debt. If you are a guarantor, you are not listed on the loan as a borrower, and you only become responsible for the debt when the borrower defaults on the loan.
Yes. You will have to let future credit providers know that you are a guarantor and if you use any assets you own as a guarantee, you may not be able to use them again for your own loans. If the borrower defaults on their repayments, the loan will be listed as a default or a non-payment on your credit report. If you default on more than $10,000, you could even be subject to bankruptcy proceedings.
Elizabeth Barry is Finder's global fintech editor. She has written about finance for over five years and has been featured in a range of publications and media including Seven News, the ABC, Mamamia, Dynamic Business and Financy. Elizabeth has a Bachelor of Communications and a Master of Creative Writing from the University of Technology Sydney. In 2017, she received the Highly Commended award for Best New Journalist at the IT Journalism Awards. Elizabeth has found writing about innovations in financial services to be her passion (which has surprised no one more than herself).
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