Licensed moneylenders are in the business of lending money both to individuals and businesses. When they give money, they need to be very sure that the money they are giving will be repaid together with interest.
The truth is that every time a money lender lends money, he is risking losing the money. This is because the future is very unpredictable, they can lend money to an individual or business today, and that person loses his job or the business fall.
To minimize making a loss, money lenders insist that a person or business person who borrows money provides a surety/guarantor for the loan taken. Who is a guarantor then?
A surety is a third party who promises to pay back the money borrowed plus interest even if the business fails or the individual loses his job or becomes bankrupt.
Types of Surety
- Personal Surety – this is when the person taking a loan takes full responsibility for the repayment of the loan.
- Third party Surety – this is when the person taking a loan finds either a friend or relative who agrees taking full liability for the repayment of the debt.
- Collateral – the individual taking the loan raises sufficient collateral/property which in case he fails to repay the loan, the property can be sold to raise the money plus interest.
Things to Consider
Before you agree to become a surety for your friend, please make sure that:
- You understand your responsibilities as a guarantor;
- You get a photocopy of the Contract at the time that the loan is issued. Ensure that you keep a record. Always maintain the copies of the Contract that you signed as a surety. Also, ensure that you keep track of the loan’s repayment and correspondence;
- Ensure that the document states the amount of money and a clause which says that the money and interest is valid for only the duration of the loan;
- The moneylender has explained the terms in the Contract in a language that you understand;
- The moneylender does not withhold your NRIC card or any other personal ID documents (e.g. driver’s license, passport).
- The moneylender does not acquire any information that contains passwords to your user accounts (e.g. Singpass account, Internet banking account, email account).
Effects of Being a Surety
If under any circumstances a borrower fails to repay the loan, as his surety, you will end up:
- Paying the loan requirements
- Paying late charges
- Paying legal fee charges and other duties.
- The unpaid debt will reflect on your credit rating as a bad debtor.
How to Protect Yourself as a Surety
Before you sign as a surety, here is how you can protect yourself:
- Seek the moneylender’s signed agreement that you will not be required to pay for the loan until the original borrower is unable to repay the loan
- Seek a signed agreement that will only make you liable only to the unpaid principal
- Once the loan has been granted, ensure that you monitor the payment responsibility of your friend/relative.
Consult your lawyer before signing as a surety and when the borrower proves irresponsible.