Checklist Before Agreeing to Become a Guarantor

A person signing on a document with wording guarantor checklist

For this post, I am going to share a checklist that you need to go through before you agree to become a guarantor.

Despite someone very close such as a family member, I believe it is still essential to go through the guarantor checklist.

It is not that we are being mean to them. But, we need to be responsible for all our actions.

Especially, a financial decision that could lead us to serious consequences such as bankruptcy.

When you agree as a guarantor, you are legally bound to pay back the loan if the borrower cannot or do not pay

This is because, when you agree as a guarantor, you are legally bound to pay back the loan if the borrower cannot or do not pay.

When the loan amount is equal to or more than RM50,000 as defined by the Insolvency Act 1967, the financial institution has the right to proceed with bankruptcy action against the guarantor to recover the debt.

That is how serious a consequence of a generous act of becoming a guarantor can be.

Do you immediately agree when someone asks you to be their guarantor? Be it for an immediate family member or a close friend?

Personally, for me, I do not immediately agree even with an immediate family member.

I will go through the guarantor checklist first.

At the same time, I will also evaluate the borrower. And to further understand the guarantee contract.

Once we signed on the agreement as a guarantor, we are liable on the agreement signed by the borrower

Because once we signed on the agreement as a guarantor, indirectly we are liable for the agreement signed by the borrower.

Here I share the checklist for you to go through before you agree to become a guarantor.

1. Do you know the borrower well?

When someone asks us to become their guarantor, usually they are someone close such as a family member or a good friend.

Even though the borrower is someone close, do you know them well? Especially on their financial status and financial habits?

People can change through the passing of time.

Someone who was prudent 2 years ago does not mean that same person is prudent now.

Get to know the borrower well especially his financial habits

So, get to know the borrower well especially his financial habits.

If needed, ask for an opinion from others who know the borrower well.

2. Do you know the reasons why the borrower require you to be his guarantor?

The main reason why financial institutions request a guarantor is that the borrower’s creditworthiness is questionable. In other words, the financial institution has doubts about the borrower’s ability to pay back the loan.

So, a guarantor assures the financial institution that the borrower will be able to pay back the loan.

If the borrower fails to pay back the loan, the guarantor will have to pay the loan.

Thus, find out the reasons why the borrower requires a guarantor.

See if you are able to accept these reasons before you agree to become his guarantor.

If you think that the borrower has overcommit, you can voice out your concern

If you think that the borrower has overcommitted, you can voice out your concern.

Perhaps you can advise the borrower if they can delay having the loan until they are able to finance it themselves.

Or, if they must proceed to have the loan, maybe look for a lower or more realistic loan amount.

3. Do you know and understand the nature of the guarantee?

Do request to have a copy of the guarantee contract. And fully understand the nature of the guarantee.

Is it the guarantee for business purposes, housing loans or car loans?

Because the different type of guarantee comes with different level of commitment, terms and risks.

Do not simply agree and sign to be a guarantor without knowing the full content of the guarantee.

In law, you are fully responsible for the documents you signed

The reason is, if you sign on a document, you have no defence in law should you decide to challenge it in a court of law.

Thus, make sure you read and understand the documents that you signed.

If needed, hire a personal lawyer to help you to understand the guarantee contract better.

4. Is the guarantee subject to the laws of Malaysia?

It is also necessary to ensure that the guarantee is subject to the laws in Malaysia.

By doing this, at least you are protected by the laws of Malaysia.

5. Do you have the capability to settle the debts if the borrower fails to pay?

Among the most important guarantor checklist is do you have the capability to pay the debts if the borrower fails to pay?

So, always ensure you know the maximum amount of the loan.

And make sure the amount is clearly written on the official agreement including interest charges.

Do you have the capability to settle the debts if the borrower fails to pay?

Then, ask yourself if you have the capability to settle the debts if the borrower fails to pay.

6. Are you willing to be the guarantor?

Also on my guarantor checklist is whether you are willing to be the guarantor.

To be a guarantor means that you are giving the financial institution a pledge that the borrower will pay the loan amount.

Else, you will pay the loan amount on behalf of the borrower.

Actually, you have the right to reject the borrower’s request to be his guarantor.

You should not feel obliged or being pressured to be the guarantor

You should not feel obliged or being pressured to be the guarantor.

Even though doing this might affect the relationship with the guarantor, it is still wiser to have a broken relationship than a debt that you didn’t apply for.

After all, a genuine friend or an understanding family member should not break ties with us just because we are not willing to become their guarantor.

Aside from the above checklist, you may find more information on guarantor liabilities, the rights of a guarantor and other useful guarantors information on the Banking Info website.

Reasons on why I agree to become a guarantor for my family member

Now, let me share my own personal experience as a guarantor.

A few years back, I myself had agreed and signed to become a guarantor for my immediate family member.

I share the reasons below on why I agreed to become a guarantor for my family member:

Because the loan is from a reputable financial institution. Whereby the officer sat down, briefed me on the guarantee letter and explained to me on my responsibility as a guarantor

I also know that my family member has the capability to serve the loan
On top of that, I trust my family member will pay the loan as agreed in the guarantee agreement. As I know him and his financial habits well
Besides, I also discussed with my husband on my family member’s request. And my husband supported my decision as my family member’s guarantor

Lastly and most importantly is because I have the capability to pay back the loan if my family member fails to do so.

See, even for an immediate family member, I will not simply sign the guarantee letter and agree to be a guarantor.

And I applied the above guarantor checklist before I decided to agree to become my family member’s guarantor.

Thankfully my immediate family member is someone understanding.

He gave me sufficient time for consideration when I told him that I need to consider his request to become his guarantor.

Final thoughts

Agreeing to become a guarantor can be something very personal.

No matter what, the next time when someone asks you to become their guarantor, please do not immediately agree to their request.

Evaluate the guarantee and borrower thoroughly before agreeing to become a guarantor

Instead, go through the guarantor checklist above. And evaluate the guarantee contract and the borrower thoroughly.

After the evaluation, you have the right to agree or to reject the borrower’s request to become a guarantor.

By doing this, either way, you are actually helping the borrower as below:

If you agree to become their guarantor, you are confident that the borrower is able to serve the loan amount. And you are doing the borrower favour by helping him to secure the loan
If you disagree to become their guarantor, you are actually helping the borrower to avoid a financial commitment which he might not be able to commit.

So, think and act wisely before agreeing to become a guarantor.

Disclaimer: My sharing above is meant as a general guideline on the rights and liabilities of a guarantor. My sharing above should not be construed as a replacement for professional legal advice. It is advisable to consult your lawyer on the specifics of your guarantee agreement.