Shouldering the burden: The risks and responsibilities of being a loan guarantor
Being a guarantor on someone else’s loan is a big responsibility that comes with considerable financial risk. Before agreeing to be a guarantor, it is important to fully understand what it entails.
What is a loan guarantor?
A loan guarantor is someone who agrees to pay back a loan if the primary borrower is unable to make the payments. Essentially, you are co-signing the loan and making yourself liable for the debt if the borrower defaults. Common types of loans that involve guarantors include mortgages, business loans, and student loans.
The risks of being a guarantor
The main risk of being a guarantor is that you can be held fully responsible for repaying the loan if the primary borrower stops making payments. This means the lender can pursue you for the missed payments, late fees, and even the full remaining balance. Even if you don’t have the means to repay it all at once, your credit score will take a major hit. Being a guarantor is an enormous financial burden to shoulder.
In addition, if the primary borrower declares bankruptcy, the creditors can still come after you as the guarantor to collect on the debt. You essentially have no escape from the obligation unless the primary borrower can repay it.
Additional reading: Deciding between HDB loan vs bank loan? Here’s a quick reference.
The responsibilities of a guarantor
When guaranteeing a loan, you are committing to much more than just making payments if needed. You must fully understand the terms of the loan and stay informed on the repayment status. It is critical to maintain open communication with the primary borrower and request updates on any issues making payments.
You should also review your finances to ensure you can realistically handle taking over loan payments if required. This includes looking at assets, income, expenses, and how it would impact your credit and savings. Being ready to step in is part of the duty you take on as a guarantor.
In some cases, you may be able to negotiate to be removed from the guarantor role once the borrower has established a strong payment history. However, you cannot walk away from the obligation without formally removing yourself.
Carefully consider before becoming a guarantor
Being a loan guarantor is a major decision that should not be taken lightly. Make sure to fully discuss the terms with the borrower and lender. Review the loan documents. Understand the risks to your finances and credit. And consider consulting a lawyer before signing anything.
While you may want to help someone, being a guarantor means putting your financial health on the line. Weigh the responsibilities and risks carefully first.
