| FAQs on Becoming a Guarantor |
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Why do financial institutions need a guarantee? |
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| A financial institution may require a guarantee as a means to enhance the credit standing of the prospective borrower and thus enabling him/her to obtain financing. |
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Guarantees are normally given in favour of the financial institution and it is normally a standard document written with legal terminology. I do not understand them. What do I do? |
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| You can request the bank officer to explain the legal implications to you or if you choose to, you can have the guarantee explained to you by your lawyer. Don't sign the guarantee if you are not comfortable with any of the clauses. |
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I have given a guarantee for a certain loan and the loan principal has reduced as a result of regular payments. The borrower has approached the financial institution for an increase in facilities which is within the amount of the guarantee signed by me. Am I liable for the newly increased amount? |
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No. If your guarantee is for a specific loan, the extent of your liability on the guarantee will diminish with the amounts paid. If the lender wishes to increase the loan against your guarantee, the financial institution will either have to obtain a fresh guarantee from you or seek your written consent to the continuation of your guarantee for the increased amount.
In the case of overdraft facilities, generally, the guarantor will remain liable up to the limit he/she has guaranteed for and any increase of the limit will require the guarantor's consent. |
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Does my signature have to be witnessed? |
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| Yes. Guarantees would normally be signed in the presence of a third party although it is quite common for the financial institution's officer to act as a witness. However, financial institutions will not normally allow a person to be a witness for his/her spouse without independent advice. |
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How do I withdraw as a guarantor? |
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| A guarantor may request to be released from the guarantee. However, the decision is up to the financial institution. The financial institution may: |
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Agree without conditions |
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Agree subject to an equivalent replacement guarantor. However, this is subject to the new guarantor agreeing to assume the present, past and future liabilities of the existing guarantor |
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Agree subject to part of the debt being repaid |
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Disagree unless the principal debt is fully repaid |
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Demand repayment of the entire debt |
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Can I agree to be a guarantor for only a specific period of time? |
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| Yes. However, this depends on the borrower's arrangement with the financial institution. |
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Can I be made a bankrupt in the event that the borrower does not repay his/her loan to the financial institution? |
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| Yes. If the debt is equal or more than RM30,000 as defined by the Bankruptcy Act 1967, the financial institution can take bankruptcy action against you to recover the debt. |
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Will I be discharged from my guarantee upon the death of the borrower? |
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| No. The financial institution will freeze the account of the borrower to determine the indebtedness and unless there are other sources of payment, the financial institution will seek recourse from the guarantor. |
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If there is more than one guarantor and each of them came to the financial institution at different times to sign the guarantee, how should we sign? |
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| It is advisable that all guarantors sign on the same document at the same time. However, in this particular type of situation, the respective guarantors can sign one guarantee document at different times (within a reasonable time frame and without undue delay). |
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I don't read or write English. Can I execute a guarantee in the English language? |
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| The guarantor is advised to have the document translated to him and it must be expressly stated on the document that the contents of the document has been explained and fully understood by the guarantor. |
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Can I be a guarantor for a loan taken by my spouse or child? |
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| Yes. However, the financial institution has the discretion whether to accept you as a guarantor. |
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If I decide to be a guarantor, do I have the right to be informed of the status of the borrower's account? |
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| You have the right to be informed of the account you guaranteed, subject to the borrower's consent. Guarantors will normally receive a carbon copy of the reminder letter which was sent to the borrower. However, the financial institution has no obligation to disclose any information on the borrower's other account(s) which is not related to your guarantee. |
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Is there a maximum age to be accepted as a guarantor? |
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| Financial institutions have the discretion to accept anyone as a guarantor as long as the legal requirements of a guarantor are met. |
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What if I am not agreeable to the changes made in the terms and conditions to the loan granted to the borrower after the contract of guarantee has been signed? |
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| Most financial institutions would include the right to vary the terms and conditions of the loan agreement. It is therefore important for a prospective guarantor to read and understand the implications of the guarantee and seek independent legal advice, where necessary. |
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Can a financial institution take legal action against the borrower and guarantor at the same time without exhausting all means to go after the borrower first? |
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| A banking institution has the discretion to commence legal action against the borrower and guarantor either at the same time or after exhausting all legal avenues against the borrower. However, with effect from 1 October 2003, the Bankruptcy Act 1967 provides that for social guarantors, i.e. a person who provides a guarantee for purposes such as: |
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Loan, scholarship or grant for educational or research purposes |
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Hire-purchase transaction for vehicle for personal or non-business use |
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Housing loan solely for personal dwelling |
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A creditor shall not be entitled to commence bankruptcy action unless he proves that he has exhausted all avenues to recover all debts owed to him by the borrower.
In addition, for personal loans up to RM250,000 taken after 26 May 2001, banking institutions are required to use their best endeavours to recover the debts from the borrower and may only initiate legal action against the guarantor after one year from the date of initiation of legal action against the borrower. |
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What if I am not agreeable to or would like to vary some of the terms in the contract of guarantee? |
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| All banking institutions have their own standard document for a contract of guarantee to protect the banking institutions' interest. Ultimately, you will have to decide, after due legal counsel if necessary, whether or not to sign the guarantee on the terms required by the banking institution. |
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