If a friend, business associate or family member has approached you to act as a guarantor for a car loan in Singapore, take a moment to understand the consequences before appending your signature.
Many are the times when guarantors sign agreements for car purchases without thorough consideration, forget about it, and suddenly get shocked years later to receive legal demand for repayment of hefty amounts plus interest a few years down the line. Well, this should not be shocking because it is exactly what they signed for!
Once you sign up for the agreement form, your hands are tied up, and there will be little or no room for changes. So, before you can accept to serve as a guarantor for car financing in Singapore, here are the most important considerations.
Being a Car Loan Guarantor in Singapore: What Does it Mean?
Before we can look at the critical issues to consider, let’s start with a deeper check at the term guarantor. So, what does it mean to be a guarantor?
In Singapore, some loans such as education, housing, and car loans require the applicant to work with a guarantor. When you sign that agreement form as a guarantor, it implies that you commit to repay the full or remaining loan amount plus interest and applicable charges in the event that the original borrower defaults.
It also means that the lender will not need to worry much or keep chasing the original borrower over the years for loan repayment. Instead of targeting the one who made the application, the lender comes for you.
Apart from paying the principal loan and interest, you will also be liable for other associated charges plus legal fees arising from payment delays. If you cannot repay the loan, your credit score will be impacted negatively, making it harder for you to get credit in the future.
The worst-case scenario is when you cannot repay the loan as a guarantor for a car loan in Singapore and the lender applies for seizing your personal property. It might even escalate to bankruptcy proceedings, a "painful" and life-altering procedure with serious implications in your life. If you are declared bankrupt, you will be unable to travel abroad or even open a business in Singapore. Even when you apply for a personal loan, no lender will want to enter into an agreement with you.
Consider the Follow to Become a Guarantor for a Car Loan in Singapore
Here are the four most important things to consider before making the big decision to be a guarantor for a car loan in Singapore.
Are You Capable and Willing to Repay the Loan?
This is perhaps the most important question to ask yourself when approached to act as a guarantor. By signing the agreement, you commit to immediately step into the borrower’s shoes if they are unable to meet the laid down obligations, including repaying the borrowed amount plus interests at the predetermined rates and penalties. So can you pay the loan at the provided rates?
Factor in your personal budget, family needs, and perhaps the fact you are also repaying other loans. So, can you be able to shoulder the additional burden?
You need to be alive to the fact that the lender can come after you any time. There are many scenarios when a lender can come to you and demand repayment, and this is very hard to predict. So, only agree to act as a guarantor for a person that you will not mind paying the bank loan in full without getting hurt.
Let’s put it differently. If the amount being borrowed is more than you are ready to lose, do not sign the agreement form. You might also want to ask your friend to pick a different cheaper car that is easier to pay because the price is lower.
The Likelihood of the Borrower Repaying the Loan
This is a very challenging thing to determine, but we will tell you a number of things to check.
Find out about the borrower’s other financial liabilities and existing debt repayment commitments. Good examples include student loans and credit card loans in Singapore.
The reliability and amount of income the borrower makes per month. If the borrower is seeking an amount that is too high for his/her income at the given interest rates, consider that as a red flag.
What is the borrower’s credit history? Has he/she been repaying bank loans or other dents in line with pre-drawn agreements? If the borrower has a poor credit history, there is a probability that he/she will also default this time.
These are the main issues that the lenders consider when issuing loans. As a guarantor, you are taking a higher risk compared to the lender, and it is crucial to carry due diligence just like a lender.
So, go ahead and ask for the borrower’s loan repayment schedule, COE, latest salary slips, and credit history reports. If the borrower is hesitant to provide this information, the chances are that he will default on the loan. So, do not agree to be a guarantor for his/her vehicle loan in Singapore.
What Situations Trigger the Lender to Go for the Guarantor for Car Loan in Singapore?
When crafting loan agreements, lenders will always aim at making the work of recovering their funds as easy as possible. In most cases, they include even minor breaches of the loan terms and agreements plus a change in the borrower's personal circumstances.
Therefore, it will be crucial to look for these triggers and only guarantee a loan where the lender commits to first pursue the borrower before coming to you as a guarantor.
In some instances, the guarantor in the agreement is designated as being jointly liable for the bank loan with the borrower. So, the lender is at liberty to go for either the borrower or guarantor for repayment. Therefore, the lender might want to come to you for repayment even when the borrower has not defaulted.
Is There a Way to Protect Yourself Before Becoming a Loan Guarantor?
Agreeing to serve as a guarantor for a car loan in Singapore is a major responsibility and includes the risk of repaying the loan plus interests and penalties. A closer look at loan agreements reveals that they are carefully drafted to make it easy for the lender to come for you in the event the borrower fails to repay. They also have clauses that make it very difficult for both the borrower and guarantor to resist paying.
The best way to protect yourself is by working with a lawyer to help you review the loan agreement for the person you intend to act as a guarantor. Although lawyers are less likely to assist with negotiating for better terms, they can come in handy to assist you in understanding major implications for acting as a guarantor for a car loan in Singapore.
If a lender is reluctant to provide the loan agreement with the borrower so that you can seek legal advice, this alone should serve as an alarm. Such a lender might not be registered in Singapore or could even have some hidden charges that might be unearthed by the attorney.
Being a guarantor for car loan in Singapore is a major undertaking, and you should only accept when fully prepared to take up the responsibility. If you find any red flag, it will be better to turn off the request to be a guarantor instead of dealing with the weighty consequences.
As you consider guaranteeing the personal loan, perhaps there is one more thing to do: Advise your friend to consider vehicle financing through Lendela, via a personal loan.
With Lendela, you submit an application for a personal loan in Singapore, which you then use to purchase the car. See – the personal loan makes it possible for you to avoid being a guarantor and your friend is able to purchase a car either way: A win-win situation for both of you.