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What is Loan Guarantor in Malaysia & What Do They Do?

When venturing into personal loans in Malaysia, one term you might frequently encounter is ‘loan guarantor’. But what is a loan guarantor, and more importantly, what do they do?

In this article, we dive into what is a loan guarantor, shedding light on who they are, why you would need one and more.

Whether you’re considering becoming a guarantor, need one for a loan, or are just curious about the financial landscape in Malaysia, this guide will provide you with the insights you need.

So, let’s unravel the mystery of loan guarantors together and understand their crucial role in Malaysia’s financial world.

What is a Loan Guarantor?

In Malaysia, a loan guarantor plays a crucial role in the borrowing process, serving as an individual who assures a bank or financial institution that a borrower will repay a loan.

This obligation becomes active if the borrower fails to pay the loan and begins with the bank sending a demand letter to the guarantor, officially requesting payment.

More importantly, banks in Malaysia have the authority to demand repayment from both the borrower and the guarantor simultaneously.

There is no legal obligation for banks to first fully pursue repayment options with the borrower before they can approach the guarantor for repayment.

However, banks generally demonstrate their efforts to recover the loan from the borrower first before targeting the guarantor.

What are the Types of Loan Guarantors in Malaysia

There are two primary types of loan guarantors in Malaysia: social guarantors and non-social guarantors.

A social guarantor is an individual who guarantees a loan without expecting any financial gain.

They often help family members or friends in non-profit contexts, such as buying cars or houses and financing education.

On the other hand, non-social guarantors are individuals who guarantee loans for profit-driven reasons, like commercial or business loans.

However, not everyone can become a loan guarantor in Malaysia. Banks and financial institutions have specific criteria, for example, the loan guarantor:

  • Must be at least 18 years old.
  • Must clearly understand their responsibilities.
  • Must voluntarily agree to the role without any form of pressure or deception.
  • Should not be in a state of bankruptcy.

Additionally, banks may consider other factors, such as the individual’s income level, monthly commitments, and credit record, before accepting them as a guarantor.

Why Would You Need A Loan Guarantor in Malaysia

Here are several scenarios where an individual might need a loan guarantor in Malaysia:

1. Lack of Credit History

Banks and financial institutions often hesitate to extend credit to people without a proven track record of managing debt.

This is common for young individuals or those new to the country who haven’t had the opportunity to build a credit history.

2. Recently Started a New Job

Banks generally prefer borrowers with stable employment. If someone has recently started a new job, financial institutions might view them as high-risk due to the lack of long-term job stability.

3. Low-Income Level

If an individual has a low income level, they may not meet the minimum income requirements set by the bank or financial institution for the loan they wish to take.

In such cases, a guarantor with a higher or more stable income can assure that they can repay the loan.

4. Poor Credit Score

A person with a poor credit history, which includes late payments, defaults, or limited credit history, might not be seen as a reliable borrower.

However, a loan guarantor with a good credit score can help mitigate these risks.

5. Financial Commitments

Certain financial obligations, such as renting properties, securing personal or business loans, financing a car, or obtaining a mortgage, might require a guarantor.

This is particularly true if the loan amount is substantial or if the borrower’s financial stability is not enough to meet the financial institution’s criteria.

6. Trust and Relationship

Lastly, being a guarantor is a significant responsibility, and it’s crucial that you have a strong, trust-based relationship with the borrower, where you can hold candid discussions about financial matters.

Read More: Home Equity Loan vs Personal Loan Malaysia: Which is Better? 

What are the Advantages of Becoming A Loan Guarantor in Malaysia

1. Helps the Borrower Obtain a Loan

When you act as a guarantor, you provide the financial institution with additional security, significantly enhancing the borrower’s chances of getting their loan approved.

This is because financial institutions often view a guarantor as a safety net, ensuring that there is another source of repayment if the borrower fails to make their payments.

2. Increases the Borrower’s Potential Loan Amount

Your role as a guarantor can also impact the amount of money the borrower is eligible to have.

With your financial backing, the borrower may access larger loan amounts than they would have qualified for on their own.

This can be incredibly advantageous if the borrower is looking to make a significant purchase or investment, such as buying a home or starting a business.

3. Improve the Borrower’s Credit History

A good credit history is crucial as it opens the door to future financial opportunities and better loan terms.

By ensuring that the borrower consistently makes timely repayments, their credit score will improve, enabling easier access to credit in the future and potentially at more favourable interest rates.

Read More: What Can You Use A Personal Loan for in Malaysia

What are the Disadvantages of Becoming A Loan Guarantor in Malaysia

1. Guarantor Risks Assuming the Debt Responsibility

As a loan guarantor, you are legally responsible for the loan.

If the borrower fails to repay, you must cover the payments, which can be a significant financial burden, especially if you’re unprepared.

Moreover, in cases of default by the borrower, financial institutions may initiate legal actions against you to recover the loan amount.

2. Potential Negative Effects On the Guarantor’s Credit Score

Should the borrower default, your credit rating may suffer, leading to severe consequences. These include the risk of asset seizure to cover unpaid debts, especially if the borrower is declared bankrupt.

Moreover, in cases where debts exceed RM100,000 and the borrower defaults, you, as a loan guarantor, could face bankruptcy proceedings.

Such a scenario can destabilise not only your finances but also your professional life, as many employers hesitate to hire individuals with a history of bankruptcy.

What’s more, being declared bankrupt restricts your business activities. It limits your ability to own or operate a business, which can be a major setback for entrepreneurial pursuits.

You might also be prohibited from international travel due to immigration policies, affecting both your personal and professional life.

Read More: Should You Use Your EPF Savings to Apply for a Personal Loan

What to Ask Yourself Before Becoming A Loan Guarantor in Malaysia

Before deciding to become a loan guarantor in Malaysia, it’s essential to ask yourself a series of critical questions to understand the responsibilities and potential implications of your decision.

They include:

1. Are you fully aware of the potential financial responsibilities involved?

You must understand not just the basics of being a guarantor but also the full extent of what you might be required to pay if the borrower defaults.

Moreover, it’s crucial to assess whether you’re financially stable enough to handle such a scenario without it causing significant strain on your own financial health.

2. Do you trust the borrower’s ability to fulfil the repayment terms independently?

Evaluate your trust in the borrower’s ability to fulfil the repayment terms based on their financial stability and history of managing debts.

If the borrower has a shaky financial history or if you have doubts about their ability to repay the loan, this could pose a significant risk to you as a guarantor.

3. Do you understand the circumstances that would require your financial intervention as a guarantor?

You should be clear about the conditions under which you would be called upon to pay and under what circumstances the financial institution would consider the borrower to have defaulted.

This information is crucial for assessing the risk involved in guaranteeing the loan.

4. Are you prepared for the financial implications that may arise from being a guarantor?

Additionally, you should consider how being a loan guarantor can affect your credit score, your ability to take out loans in the future, and your overall financial planning.

It’s important to be aware that your financial obligations as a guarantor might last for the duration of the loan, which could be several years.

5. Have you thought about how guaranteeing a loan might affect your personal relationships?

Money matters can strain even the strongest relationships, so it’s crucial to consider how your relationship with the borrower might change, especially if they fail to meet their repayment obligations.

How Bluebricks Can Help You Understand What is Loan Guarantor in Malaysia

Understanding what is a loan guarantor can be complex, especially when navigating various loan options and financial circumstances.

Bluebricks is a trusted bank loan and debt consolidation agency in Malaysia, offering a variety of financial solutions tailored to your needs. They include:

Trusted Personal Loan Consultancy Services

What sets us apart is our dedicated loan consultancy service. Our expert possess the knowledge and experience to recommend the most suitable loan product based on your unique circumstances.

We take into account crucial factors such as:

  • The specific loan amount you require.
  • The urgency with which the loan amount is needed.
  • Whether you or your parents own a property that has been held for over ten years.
  • Your income level.
  • Your CTOS score (such as your credit score and credit history).

What is Loan Guarantor – FAQs

A loan guarantor is a critical figure in many lending scenarios, offering security to financial institutions and assistance to borrowers.

Understanding the roles, responsibilities, and risks associated with being or having a loan guarantor is essential for anyone navigating the realms of personal finance, student loans, or business funding.

Through a series of insightful FAQs, this guide will clarify what is a loan guarantor and more.

Can a loan guarantor be removed from a loan in Malaysia?

Removing a guarantor from a loan in Malaysia is challenging. A guarantor can be released from their obligation only under certain conditions: if the borrower has fully repaid the loan or if the financial institution consents to the guarantor’s release.

However, financial institutions are often reluctant to release guarantors unless the borrower demonstrates adequate income, assets, or creditworthiness to manage the loan independently.

An alternative option for the borrower is to refinance the loan with a different bank who doesn’t require a guarantor (but this may involve additional costs and fees).

What happens to a guarantor’s obligations in Malaysia if they pass away?

In Malaysia, a guarantor is usually responsible for the borrower’s debt until it is fully paid or the financial institution releases them from this obligation.

However, if the guarantor passes away, their estate (e.g. assets and liabilities) might be liable for settling the debt.

Nevertheless, there are specific scenarios or conditions that might alter this obligation. For instance, if the guarantee contract includes a clause stating that the obligation ceases with the guarantor’s death, then their passing could end the guarantee.

Is it possible for a friend to act as a guarantor?

Yes, it is. When understanding what is a loan guarantor in Malaysia, it is essential to know that a variety of individuals can serve as a guarantor, including:
– Parents
– Spouses with separate bank accounts
– Friends
– Other relatives

It is crucial, though, to only agree to be a guarantor for someone you trust and to ensure you are capable of handling the repayments.

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Wilson Wai Kit

Wilson Wai Kit

Senior Consultant

With extensive banking experience, notably as a mortgage sales officer at UOB Bank, Wilson leverages his understanding of loan applications and approvals to offer financial insights and support to empower individuals to make informed decisions regarding their financial futures.

Feel free to contact him for assistance with your financial needs!

Contact Wilson
Wilson Wai Kit

Wilson Wai Kit

Senior Consultant

With extensive banking experience, notably as a mortgage sales officer at UOB Bank, Wilson leverages his understanding of loan applications and approvals to offer financial insights and support to empower individuals to make informed decisions regarding their financial futures.

Feel free to contact him for assistance with your financial needs!

Contact Wilson

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About Bluebricks

BlueBricks Holding is one of the top ten leading loan agency companies in Malaysia in terms of loan approval rates. As a leading loan agency company, we have extensive knowledge and experience in mortgage, personal loans, and business loans, and this enables us to help our customers to get the deal that is best suitable to them.

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