When we talked about being 'blacklisted' by Bank Negara, we were of course sent questions about the issue. One that struck us as a common problem seemed to be: what happens if a person is 'blacklisted' not through his own fault, but through that of a borrower whom he provided a guarantee for in a loan agreement?
Today, we tell you exactly what it means to be a guarantor but be warned; if you didn't know before, you may not like what you will read.
What is a Guarantor?
A guarantor is someone who provides a bank or lending institution with a guarantee that the person borrowing money will repay. But this isn't just a guarantee in words alone: it means, you are responsible for making sure the bank gets paid, even if it means you have to pay for the loan yourself!
In a nutshell, the guarantor is liable to repay the loan if the bank is unable to collect the amount from the borrower. The exact details of the guarantee document which a guarantor signs may differ from bank to bank but the responsibility remains the same.
So, I Have to Pay for a Loan I Didn't Take?
The simple answer is yes. But, you will usually only be liable for the amount when you receive a a letter of demand from the bank. Unfortunately, the bank has the right to demand repayment from you at the same time they demand payment from the borrower. There is, at the moment no law that forces them to go after the borrower first, unless in select cases of personal loans or if they want to institute bankruptcy proceedings. Even in such instances, the bank only need show that they did do everything they can to contact the borrower and failed.
This sadly also means that if the borrower has defaulted; this record will show up on your credit rating and the only way to clear it is to get the borrower or yourself to pay up the owed amount.
Can I Get Out of It Now?
Depending on the terms of your agreement of guarantee with the bank; they may or may not let you get out of being a guarantor. The norm is that most banks will not allow it unless the loan is paid off in full. The only other way is if the bank acted in a way that contravenes the agreement (which they wouldn't do!).
But do try talking to the bank if you are concerned that you won't be able to make the repayment. It's unlikely but always worth a shot. Some banks may agree with some conditions.
The other step you can attempt is to get the borrower to sign a letter of indemnity for you (if you have not already done this), to ensure that if he/she should default; you will be able to take legal action against them. If the borrower is sincere, getting a letter of indemnity should not be a problem even at a later stage, though it is always advisable to get it before you sign the guarantee agreement.
For the Would-Be Guarantor
If you are thinking of becoming a guarantor for someone, hold up! You'll want to know the following things first. Here's a list of to-do's before you sign the dotted line.
- Read the contract word for word and if you are unable to understand the legalspeak; hire a personal lawyer to explain to you exactly what your liabilities are within the guarantee agreement. Do not sign anything you do not fully understand.
- Ask yourself if you will be able to repay the amount (and if you're willing to repay the amount) should the borrower default.
- Sign a letter of indemnity with the borrower to ensure that if they miss a payment, you will be able to institute legal proceedings against them.
- Make sure the document contains clear details on your liability and the amount you will be liable for including interest charges. If anything is missing, don't sign. Never, ever sign a half-finished document!
Being a guarantor means being liable for someone else's loan repayments if they don't pay it, so don't take the request lightly. Unfortunately, there isn't much leeway to get out of a guarantee agreement once you've given it so think wisely before committing!
Disclaimer: The above is meant as a general view on the liabilities of a guarantor and should not be construed as a replacement for professional legal advice. Do consult your lawyer on the specifics of your guarantee agreement should you have further concerns.