Should You Be A Loan Guarantor For Your Friends And Family?
Someone you love asks you to guarantee a loan. The instinct is to answer the question "do I trust them?" That is the wrong question. The right one is "could I pay this myself?", because that is what you are agreeing to.
Table of Contents
What a guarantee actually is
Under section 79 of the Contracts Act 1950, a guarantee is a contract to perform the promise, or discharge the liability, of a third person if they default. Section 81 adds the part nobody explains at the signing table: the guarantor’s liability is co-extensive with the borrower’s, the same amount and the same terms, unless the guarantee document says otherwise.
Three consequences follow, and each one surprises people.
It is the whole balance, not a share. You are not guaranteeing “your part”. You are guaranteeing the loan. If the borrower stops paying with RM38,000 outstanding, the bank’s claim against you is RM38,000, plus interest and costs.
The bank can come to you first. There is a common belief that the lender must exhaust every remedy against the borrower before turning to the guarantor. Because the liability is co-extensive, the default position is that the bank does not have to sue the borrower first, unless the guarantee document itself says so. In practice, banks pursue whoever is easier to recover from. A salaried guarantor is often easier than a borrower who has stopped answering.
It follows you. A guarantee is a contingent liability on your own credit file. Bank Negara’s CCRIS report lists facilities in two sections, “as borrower” and “as guarantor”, so every lender you approach can see it, and may weigh it in your debt service ratio for as long as the facility exists.1
The three questions
One: what exactly am I guaranteeing? The facility amount, the tenure, the rate, and whether the guarantee is limited to a stated sum or is “all monies”, covering any present and future debt the borrower owes that lender. An all-monies guarantee is materially more dangerous, and bank guarantee templates are often drafted that way. Read the heading of the document.
Two: could I pay it myself? Take the monthly instalment and add it to your own commitments. If your own finances could not carry that instalment for the full tenure, you cannot afford to guarantee it. Trust is irrelevant to this question. Circumstances change; the guarantee does not.
Three: how do I get out? Usually, you do not. A guarantee generally cannot be withdrawn by the guarantor once the money is disbursed. Release requires the lender’s consent, in practice on full settlement or on substitution of another guarantor the bank accepts. Ask, before signing, what the release conditions are, and get the answer in writing.
Run iMoney’s debt consolidation calculator and do a self-check for free!
The protections that exist
Malaysian law does give guarantors two meaningful protections, and both are worth knowing.
Social guarantors and bankruptcy. Under the Insolvency Act 1967, a social guarantor is someone who gave a guarantee for no gain, for one of three things: an education loan, scholarship or research grant; a hire purchase of a vehicle for personal use; or a housing loan for a personal dwelling. Since the 2017 amendments, section 5(3) gives a social guarantor absolute immunity from bankruptcy proceedings. Not conditional, not after the bank has tried the borrower first: the creditor simply cannot petition for your bankruptcy.2
Everyone outside those three categories is a non-social guarantor, and the protection is partial: under section 5(3)(b) the creditor must obtain leave of court before starting bankruptcy proceedings, and must satisfy the court that it has exhausted its remedies against the borrower. The Court of Appeal confirmed in 2024 that this applies to guarantors of trade debts as well as loans.3 The bankruptcy threshold itself is RM100,000 of debt.
Immunity from bankruptcy is not immunity from the debt. It does not prevent the bank from suing you, obtaining judgment, or enforcing that judgment against your assets and salary through the ordinary civil routes.
Disclosure and conduct. Bank Negara’s Fair Treatment of Financial Consumers policy requires lenders to disclose key terms clearly to the people who sign them, which includes a guarantor. If you were not told the facility amount, you have grounds to complain, but you still signed.
Visit iMoney’s articles on money management for more information.
The university intake angle
This is the season for it. A relative’s child has a place, PTPTN has not disbursed, a private loan or a hire-purchase for the commuting car is on the table, and someone in the family with a steady salary is asked to sign. The request is made with love and answered with love, and neither party reads the document.
Read the document. Ask the three questions. And if the honest answer to question two is no, say so, because the alternative is discovering in year three that the loan you guaranteed for someone else has become the loan you are paying for yourself.
This article is general information and not legal advice; anyone asked to sign a guarantee should read the document and, for a large facility, take legal advice.
Sources: Contracts Act 1950 ss.79, 81; Insolvency Act 1967 ss.5(3), 5(4) as amended by Act A1534 (2017); Yuri Zaharin Wahab v Ann Joo Metal Sdn Bhd [2024] CA; Bank Negara Malaysia CCRIS report format; BNM Policy Document on Fair Treatment of Financial Consumers.
Frequently Asked Questions on Having a Guarantor for a family member
No, under Section 81 of the Contracts Act your liability is co-extensive with the borrower’s, meaning the full outstanding balance, not a share.
Yes, by default the bank doesn’t have to exhaust remedies against the borrower first, unless the guarantee document says otherwise.
Social guarantors, those who guaranteed an education loan, a personal-use hire purchase, or a housing loan for no gain, have absolute immunity from bankruptcy under Section 5(3) of the Insolvency Act.
