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What’s worse than being a borrower?

Posted By fathersez On December 19, 2007 @ 9:20 pm In Debt, Legal

Simple, being a loan guarantor! 

A guarantee ties the guarantor with all the obligations the borrower has in respect of the loan the borrower has taken, but none of the “benefits”. 

Or in other words, a guarantor is a borrower who never got the money. 

Banks in their well funded quest to make sure that no loan given out is left uncollected, very often insist on another party, (other than the borrower) to guarantee the loan. Hence if the borrower defaults, the guarantor pays. 

The main rule is “Never sign a guarantee”. 

The [1] Malaysian Insolvency Department seems to agree. In fact, this is what they are openly announcing. 

Can we live with this rule?  

Banks, at least many in my country anyway, insist on a guarantor, even if the borrower meets all requirements. They just want to play safe. And the loan documents would say (in fine print, of course) that it is up to the Bank to choose who they want to go after, in the event of default. 

Organisations which give study loans, also insist on guarantors. In fact, they usually ask for two, and disqualify the parents. 

My wife has had a bad experience. A “friend” got her to sign a study loan guarantee, during my wife’s younger and much more ignorant days. (Now she’s young but not so ignorant.) The lender made a claim on my wife, claiming they could not find this dead beat borrower.  

The trouble my wife went through to track this bum of a “friend” down and get herself out of this jam has taught her a good lesson. 

But there are plenty of others out there, either nursing bad financial wounds or ending up as financial ICU cases themselves because of guarantees they had signed. 

Can we always say no? I don’t think so.  

We think, evaluate and weigh carefully many choices that we make in our lives. Just like that we have to weigh carefully the signing of guarantees. 

These are the rules we have set in our family. 

1st – Follow the Main rule for all except family  

2nd – For family, what is the purpose of the loan? 

3rd – Has the borrower demonstrated, what we feel is adequate pf knowledge and discipline for us to believe that we will not be “called on” to pay the guarantee. 

4th – What is the downside? Can we live with it should the worse case scenario play out? 

My history on guarantees so far are :- 

a) I gave an indemnity on a scholarship secured by my nephew, who did medical studies in a local university. He had to pay a certain sum, should he not serve the Government for a certain number of years after graduating. He is nearing the end of his “bond”.  

b) I signed as a guarantor for my cousin who took a housing loan. This was well before the setting up of all the above rules. I am happy to say that he has paid back the loan and bought another 3 units since then. 

Both the above turned out well.  

On the receiving side, two of my wife’s uncles have signed a guarantee for my second girl’s study loan. I strongly suspect that they did not evaluate this issue as carefully as I might have. Or perhaps they do have high regards for my family’s fiscal discipline.

I am indeed most grateful to them, as without meeting this condition, my daughter would not have obtained the loan.  

I don’t often receive requests to be a guarantor. If I do, I just smile and say that my employer has rules that prevent me from taking on financial obligations without their approval.  

This has so far worked for me. 

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URLs in this post:
[1] Malaysian Insolvency Department seems to agree: http://www.nst.com.my/Current_News/NST/Monday/National/2111378/Article/index_html
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