Have you ever been approached by a friend or family to become a guarantor in a loan? Have you been ‘assured’ that it is okay and the risk is low to become a guarantor? Before you make the decision to sign any documents that make you the guarantor, make sure you know what you are in for.

Never Agree to Sign without Reading!

Make no mistake about it, being a guarantor is no joke. You must know that being a guarantor is easy, maintaining it is another thing altogether. Below are some of the facts that you must know.

It is a long-term commitment

When you sign to become a guarantor, you are getting into a long-term commitment. In fact, you will be tied to the contract for as long as the loan owner. This means that if your friend signs a 5-year loan agreement, you are tied to the same duration. In other words, you are almost the same as taking a 5-year loan yourself but you do not have the money.

Similar as applying for a loan

As a guarantor, you are evaluated based on your financial health as well. What the money lender (bank or registered money lender) will do is that they will:

  1. Require you to submit your documents like pay slip, bank statement and such
  2. Carry out a check on your financial status
  3. Evaluate your ability to be the guarantor
  4. Approve or reject your application

At the end of the day, you will be analyzed to ensure that in the situation that the loan applicant is unable to pay back the loan, you will have to do so.

Easy to get involved

Regardless of what people say or tell you, it is very easy to get involved in becoming a guarantor. This is because you will normally be asked to become a guarantor for someone you know. It could be a friend, a family or someone close to you. No one is saying that you should not trust your close friends and family but you could easily get entangled into a debt situation without knowing it in the beginning.

Purpose of asking you to be the Guarantor

Think about it, what was the reason why the loan applicant needs a guarantor in the first place. In most cases, they need a guarantor because of one of the following reasons:

  1. Bad credit history – They cannot apply for any loans based on their own financial history because of bad payback history or poor financial health
  2. Age – applicants at a certain age might not be able to apply for loans as they are close to the retirement age. This means that they might need a guarantor so the banks can be assured of their money back
  3. Blacklisted – Applicants who are blacklisted will not get a loan. A guarantor might help but it is still a 50/50 chance
  4. High commitments – The applicant might have too many loans or credit cards which mean that he will have difficulty applying for another loan. He will need this loan to help cover another loan

If you look at how this works, it means that they are in tight financial situations. So, being a guarantor means that you will have to be ready for a situation where he might default. If you are okay with this arrangement, ensure that you have discussed it beforehand so that you can solve any dispute if it happens in the future. You cannot be too complacent about this.