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Financial institutions may require guarantees to enhance the credit standing

of prospective borrowers, thus enabling them to obtain financing.

Many people think that a guarantor gives a reference of the good character

of the borrower. They do not realize that they are legally bound to pay back

the loan if the borrower cannot or will not pay.


A guarantee is a legal contract that binds you to pay the debt of the borrower if the borrower fails to do so. The financial institution can sue you when the borrower does not pay back his/her debt.


Anyone can be a guarantor as long as the person can meet the legal requirements to be a guarantor. However, since a guarantor would be liable to pay the debts of the borrower in the event the borrower defaults, you should consider becoming a guarantor only if you are sure that you can pay the debts of the borrower in the unfortunate event that he/she fails to do so.

The legal requirements of a guarantor include the following:

• Must be 18 years old or above

• Must not be a bankrupt

• Must be of sound mind and have the mental capacity to understand the guarantee document and the responsibilities and obligations of a guarantor

• Must have freely consented to being a guarantor

Nevertheless, the final decision whether or not to accept you as a guarantor lies with the financial institution.


There are certain rights accorded to you as a guarantor before and after signing the contract of guarantee. These include:

• The right to obtain a copy of the letter of guarantee or contract of guarantee and any other documents in relation to the loan transaction

• The right to seek advice from your lawyer before signing the contract of guarantee.

• The right to the information on the outstanding balance of the account of the borrower with the financial institution subject to the borrower’s consent

• The right to call upon the borrower to pay off the loan to release you from all your liabilities under the guarantee. This right can be exercised at anytime and even before the financial institution has called upon the borrower to pay the debt. However, this right may be subject to the terms and conditions of the loan, which may vary from customer to customer

• The right to be indemnified by the borrower for any payment made to the financial institution. This means that you can sue the borrower for the amount that you have paid to the financial institution


More often than not, guarantors willingly sign the contract of guarantee without fully realising the impact it may have in the future. Therefore, it is extremely important for a prospective guarantor to read and understand the contract of guarantee before signing. Below are some points to explain the liabilities of a guarantor:

• The extent of the liability of a guarantor will be as specified in the guarantee document

• A guarantor may be held liable for the liabilities of the borrower in accordance with the terms of the guarantee document


• Where a guarantee is made payable on demand, a financial institution cannot bring an action against the guarantor until a demand has in fact been made under the guarantee against the guarantor

• Depending on the provisions of the contract of guarantee, a demand may be served by hand, by ordinary post or by registered mail

• The financial institution has six years from the date of the first demand to bring legal action against the guarantor


• A guarantor is released from his obligations under a guarantee upon full payment of the debt owing to the financial institution

• For a guarantee to be enforceable against the guarantor, the terms of a guarantee must be adhered to by the financial institution

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