A borrower with poor credit scores can use collateral to drive down potentially-high interest rates. However, they can use people with enough credibility and resources as a form of collateral.
A loan guarantor functions like an asset except for their legal responsibilities. When borrowers fail to pay their loan, the guarantor assumes their role. Most situations involving parties who ran from their roles have guarantors fulfilling the role until all three parties resolve their respective issues.
Truthfully, both lenders and borrowers profit from using a guarantor in many circumstances. Properties, vehicles, and other static collateral have a fixed market value. However, a guarantor must have employment that actively generates income. Plus, guarantors must have enough assets to shoulder the debt when the borrower fails to pay their financing.
Lenders can virtually demand anything from guarantors, making it a high-risk role suitable between Singaporean family members.
As a guarantor, you’ll possibly fulfill the following roles:
- Certifiers: You’re the borrower’s conduct reference person. When lenders contact you about the borrower’s conduct, you can tell anything that supports the latter. Guarantors acting as certifiers are possible character references in job or tenant interviews too.
- Limited and Unlimited Positions: A limited guarantor role has a fixed timeline of guaranteed assumed debtor responsibilities when borrowers fail to pay their financing. Unlimited positions leave a guarantor to assume all responsibilities until they or the borrower had completely paid everything due in the financing.
- Trustworthy Representative: As a guarantor, you’re the best representative of your debtor. With your presentable credit rating, stable income and employment, and noteworthy preferred borrower status, you can elevate another borrower’s preferability by being their guarantor.
Truthfully, anyone can be a guarantor for any financing as long as you’re willing to sign your borrower’s loan agreement together. Plus, guarantors must accept that once the borrower defaults, they’ll be next in line to assume all payments for everything. Parents are the number-one guarantors when financing involves students in most education loans.
For simplicity’s sake, we used these criteria to help guarantors know if they can handle the responsibility.
- Enough Assets: You don’t need to be a millionaire to become a good guarantor. However, your assets must be roughly three times the borrower’s total loan amount and future outstanding debt.
- Employment and Income: Banks and lenders will never accept guarantors with unstable employment and income. However, they will prefer self-employed and business owners as guarantors.
- Trust The Borrower: Family members are the best guarantors because they have complete trust in the guaranteed borrower and will never leave them hanging. If you’re to act as a guarantor for friends or other parties, think twice and ask yourself if you’re willing to handle the unexpected future event.
As we’ve mentioned earlier, loan guarantors are essentially borrowers after the latter has no resources or committed a trust-breaking act, forcing lenders to seek out guarantors. Here are the two primary guarantor responsibilities you’ll assume upon agreeing to take the role.
Lenders have the full right to seize collateral in the event of a contract breach or undesirable event. Like collateral, guarantors automatically assume the borrower’s role. Their lenders can seize any collateral guarantors they’ve signed along with their respective contracts. Guarantors will assume limited or full responsibility for the loan, including all its interests, penalty charges, and other ensuing charges.
Full-responsibility guarantors are liable for all penalty fees, interest rate per annum, and other added fees. On the other hand, limited-responsibility guarantors may assume limited loan payments and added fees, depending on their contract.
With a full understanding of guarantor responsibilities, you have all the data necessary to make a wise guarantor decision. Most parents applying with their non-loan-eligible children will automatically assume a full-responsibility guarantor role.
However, business partners are likely to use limited-responsibility guarantor roles to safeguard themselves as a form of anti-trust and fairness between each or all parties. Here are five vital questions to ask yourself before you sign on as a loan guarantor.
Will You Shoulder The Borrower’s Debt?
Answering this question requires you to know the borrower you’re serving as guarantor completely. If they’re your children, it’s an easy decision because they’re family.
On the other hand, you will think twice about shouldering a stranger’s debt. Truthfully, serving as a guarantor for business partners, friends, and colleagues is still a huge decision even if you have known and trusted them for decades.
Plus, consider your existing assets and monthly income before checking your willingness to shoulder the borrower’s debt. If you’re paying for multiple financings, such as mortgages, vehicle loans, and other financings, we highly advise avoiding guarantor responsibilities, even for your children.
With your unemployed and non-loan-eligible children, you understand they lack the means to pay their financing. However, business partners can take on financing to expand and scale your joint venture. They will likely sign you on as a guarantor. You can confidently do so if you trust your business partner to have made sensible decisions together in the past.
Your trust in the borrower will weigh heavily on your guarantor’s acceptance. Most borrowers won’t immediately agree to become guarantors to friends they’ve known to have poor financial and life decisions. Plus, successful borrowers won’t agree to become “unknown” guarantors of other borrowers their lender introduces unless they’ve fully evaluated the individual’s financial aptitude.
Lenders expect guarantors, especially a family member guarantor, to address the borrower’s fiscal and legal responsibilities. However, if guarantors fail to pay the debt or run from it, lenders can initiate a court order. Most guarantors receive a pre-court order letter, which initiates a small claims court summons within 14 days.
If the guarantor pays the debt due until the court order date, lenders will waive the court order. A trial in the guarantor’s presence or otherwise is a permanent financial record that can limit or completely jeopardize the borrower and guarantor’s future financial options.
According to Singapore law, lenders have priority collecting debt from borrowers. Limited-responsibility borrowers will cover a partial debt amount. However, lenders will prevent them from suing or demanding refunds from borrowers until the conclusion of a successful court order against the borrower.
Full-responsibility guarantors can sue the borrower the entire time, especially if the debtor ran away or disappeared. Lenders expect guarantors to assume the borrower’s role, and any engagement between the guarantor and borrower is non-correlated to them.
Becoming a loan guarantor is an enormous responsibility that makes you the next best viable option once the borrower fails to pay. You’ll be taking on a partially-unexpected financial commitment, which keeps most guarantors on edge upon signing a contract.
Most personal loans from banks and other financial institutions don’t require you to have guarantors. However, business loans and mortgages will require guarantors, especially for individuals with poor credit standing. If you have an excellent credit score and history, you can ace any loan application with minor difficulties.
A borrower’s best option is licensed moneylender personal loan, which do not require any collateral and guarantor at all. Licensed moneylenders evaluate your income, job stability, and overall character when evaluating your loan application.
If you have yet to find a dependable licensed moneylender, you can always count on us at 365 Credit Solutions for the fastest cash loan application and release in Singapore. Visit our website to apply for a loan today!