Don't Stand Guarantor Unless You Are Prepared To Repay Entire Loan If Borrower Defaults

Source : The Straits Times, Forum, Sep 7, 2007

MS ANG KAIHUI's letter to The Straits Times Forum page, 'How can I withdraw as a guarantor?' (Sept 5), again raises the issue of the duties of a guarantor and the extent of his liability.
A guarantor is a person who pledges that a loan or other type of debt will be paid.

Usually, if the borrower has taken a loan from a bank or finance company, his guarantor does this by agreeing to pay the debt himself if the borrow defaults.

A parent who co-signs a student loan for a child could be considered a guarantor - should the child default on his loan, the parent would be held liable for the remainder of what is owed.

Supplying a guarantor does not necessarily mean that a loan application will go through, because the guarantor is considered part of the loan application and his credit will be evaluated along with the main applicant's.

If the lending institution feels that the guarantor cannot make good on the debt, it will not approve the loan.

Before agreeing to serve as a guarantor, it is vital to assess the primary borrower's credit, job history, income and expenses to determine whether or not he is capable of repaying the loan.

Be prepared to repay the entire loan if the primary borrower defaults. Do not agree to offer a guarantee if you are unable to do so.

Find out if the amount being borrowed is fixed and, if so, at what amount.

Make certain that you have a copy of the loan contract and that you have read and fully understood it before signing, because there is no way to back out of a guarantee.

A guarantee agreement can be made not only during a monetary loan, but also in a real estate transaction. This tends to involve a third party who will step in and make the necessary payments if the main mortgagee or tenant cannot keep up. The third party is called the guarantor or the co-signer.

A person with a poor credit rating may need to provide a guarantee agreement to buy a car, fridge or house. Often they use another person with a good credit rating, usually a parent, friend or sibling, as co-signer.

If the borrower cannot meet his financial obligation, it transfers to the guarantor. So if the person does not make the monthly repayments, the parent, friend or sibling must make them.

Thus, it is unwise to enter into a guarantee agreement if the person you are guaranteeing will be unlikely to meet his financial obligations.

The term guarantee agreement may also be used in the context of people being offered a guarantee of satisfaction upon the purchase of goods or services.

Such a guarantee can be very difficult for the consumer. For example, products on TV 'infomercials' that offer a money-back guarantee may have a guarantee agreement that is not easy to enforce.

This is because production company may be very small, or because the guarantee is valid for a limited time only.

Having said that, most big companies that offer a money-back guarantee for things purchased from TV channels will honour their obligations.

However, a guarantee agreement of this type is usually not a signed agreement.

Therefore it may be harder to enforce, or it may prove costly to return purchases that do not fulfil their promises.

Heng Cho Choon