A guarantor is an individual who guarantees a bank or a financial institution to pay for someone else's debt. In case the person defaults the loan, the onus will be on the guarantor to pay off the existing amount. A guarantor also has the duty of ensuring to the money lending institution that the person taking up a loan will return the loan amount within the duration of the agreed upon tenure.
Role of a Guarantor
A guarantor will be liable of the following:
- Repayment defaults: If the borrower is unable to make the repayment, a guarantor will be held liable for the amount due.
- Missed repayments: Any missed repayment instalments by the borrower must be paid by the guarantor.
Why do You Require a Guarantor?
When you decide to take up a loan for building a new house or buying a new property, you need to meet with the eligibility criteria of the loan scheme. This includes age requirement, nationality requirement, and an income requirement.
In cases, where you do not meet with the minimum income requirement, you are required to bring a guarantor to the application process.
- Should be your immediate family member, i.e. spouse, parents, children, or siblings or a close friend given that he/she meets with the legal requirement of the loan.
- Must be at least 21 years old at the time of home loan application.
- Should not exceed his/her retirement age before the home loan term reaches its maturity.
- Must be a Malaysian citizen.
- Must not be bankrupt.
- Must have a good credit history.
The guarantor needs to present the following set of documents at the time of application process:
- Copy of NRIC.
- Copies of latest 2-3 months’ salary slips.
- Letter of employment stating the name, designation, joining date, monthly income, and retirement date of the guarantor.
Things to Keep in Mind
Before you become a guarantor for a friend or a family member, keep in mind the following factors:
- Becoming a guarantor can affect your credit score. If the borrower make a default on repayment or misses the deadline of a repayment instalment, you will be financially liable to make the payment on the loan. This will directly reflect on your credit score.
- Read the terms and conditions associated with the loan facility before you decide to become a guarantor.
- If the borrower requests the bank or financial institution to increase the loan amount during the loan tenure, you will not be liable to pay the excess of the financing amount.
- Make sure that your debt to income ratio is low before you become a guarantor for a housing loan application.
- Evaluate the borrower’s finances like his/her active credit lines and outstanding debts before deciding to become a guarantor for a housing loan.
Becoming a guarantor to your close ones’ housing loan facility is a financial commitment. Make sure that the risk is being minimised in terms of financial liability and an effect to your own credit score before you become a guarantor for a home loan.