Guarantees



What does it mean to be a guarantor?

If you have agreed to be a guarantor for someone, you will have to pay off his debt if he is unable to repay it himself. For example, if you were a guarantor for someone who is unable to repay his renovation loan, you could end up repaying the loan for him. You could effectively be paying for the renovation of his flat.

Agreeing to be a guarantor is not an administrative matter. Being a guarantor is a serious commitment. Think about it seriously, and seek legal advice if necessary, before you agree to be a guarantor.

What must you consider when asked to be a guarantor?

Can you afford and are you willing to repay someone’s debt?

Before you agree to be a guarantor, ask yourself if you can afford to and if you are willing to pay off someone else’s debt. If the person is unable to repay the debt to his lender, he is likely to face the same difficulty repaying you. Once you repay his debt, you may not be able to recover the money from him. This could hurt your own financial well-being.

Have you assessed the borrower’s ability to repay his debt?

Consider seriously why he needs to borrow, why he needs a guarantor and how he is going to pay off his borrowings. If the loan is to be repaid over a long period of time, make sure you are comfortable that he will have enough income over this time to repay his debt.

Ask the borrower for all his loan documentation so you can assess the loan. Ask him to provide a copy of his credit report. This will help you to verify his overall financial standing in all his credit facilities.

Find out if any other security has been given for the loan, such as a mortgage, or if the borrower has pledged a deposit. The monies deposited with the bank can be set off against and deducted from the amount owed on the loan. Additional security may lower the risk to you as guarantor.

If you are going to be a guarantor for someone’s business loan, you need to assess how likely the business will be sustainable and produce sufficient income to pay its overheads (e.g. rental, staff, utilities and suppliers) as well as repay its debts.

Understand your liability

The lender may ask you to repay a debt as soon as the borrower misses an interest or principal repayment. Ask the lender to tell you how much you will be liable for and the circumstances where the lender will ask you to repay the debt. Ask the lender if your liability is limited to a specific amount or is unlimited. Find out when your liability as a guarantor will be discharged and how you will be notified.

Understand the rights and obligations of co-guarantors

If you have agreed to a “joint and several liability” arrangement, the lender can ask you alone to pay all amounts owing to it, even if there are other guarantors. You may have rights against, as well as obligations to, your fellow guarantors. You may be able to persuade your fellow guarantors to contribute to the settlement of the loan even if the lender is unwilling to pursue them. On the other hand, you may become liable to your fellow guarantors.

What are your obligations?

Make sure you understand all your obligations by reading through the documents. Do take time to read and understand them, even if it takes a few days. Ask the lender to explain any terms and conditions you do not understand.

Principal debtor clauses

These clauses make you the guarantor liable as if you had borrowed the money yourself. So even though the borrower may escape liability, you would remain liable.

Payment on demand

The lender can seek repayment from you without having to prove it has attempted to recover the debt from the borrower. Payment must be made by you when the lender makes a demand. As guarantor, you will be liable for further charges, legal costs and interest if payment is delayed. Be clear about how a demand may be served by the lender. If you are not sure of the contents of the demand, approach the lender quickly.

Restructuring

The loan may be restructured at the lender's discretion, but this does not release you from his obligations.

Continuing security

The guarantee secures all the borrower's outstanding debts, as well as future advances to the borrower, subject to the overall limit of the guarantee plus interest, the lender’s charges and costs. You will be liable for this outstanding amount until the lender explicitly releases you from your obligations.

Subordination

You may be prevented from taking action against the borrower until the lender has recovered all amounts due to it from him first. The guarantor can only take action against the borrower after the lender has settled its own position. You cannot protect yourself by taking security or collateral from the borrower that may prejudice the rights of the lender.

Concurrent remedies

The lender may take action against you to recover the loan without first having to take action against the borrower. The lender may also take action against you at the same time as any proceedings against the borrower.

Set off

The lender may deduct your monies if held in a savings account with it, to set off against any amount due under the guarantee.

What happens if you are unable to settle the debt?

If you cannot settle the debt, there will be serious consequences. Your credit report will be affected and it might be difficult for you to borrow in the future even if the amount under the guarantee is eventually settled.

If you are in default of $10,000 or more, you may be subject to bankruptcy proceedings. A bankrupt faces many restrictions including restrictions on taking a loan, engaging in business and going abroad.

 

The above information is prepared in collaboration with the Ministry of Law and Association of Banks in Singapore.