A car loan guarantor refers to an individual or entity who agrees to repay a borrower’s car loan if the borrower defaults. Guarantors are required when the borrower is young with no established credit record, self-employed with fluctuating income, or has a high debt-to-income ratio. The guarantor’s financial strength and credit standing become crucial, as banks will assess the guarantor’s income, liabilities, and credit history before approving the loan.
Guarantors can increase loan approval chances, as they reassure lenders that repayments will be secured even if the borrower faces financial difficulties. Being a guarantor carries serious legal responsibilities. If the borrower defaults, the guarantor is liable for the full outstanding loan balance, including interest and any late payment charges
What is a Car Loan Guarantor?
Who Can Be a Car Loan Guarantor in Malaysia?
Eligible guarantors must meet specific criteria set by Malaysian banks. Most financial institutions require guarantors to be at least 18 years old, mentally competent, and not under bankruptcy proceedings. Additionally, guarantors must have a stable income and a clean credit record to demonstrate repayment capability.
For instance, Maybank and CIMB typically assess a guarantor’s debt-to-income ratio (DSR) to ensure they can handle additional financial obligations. If a guarantor has existing loans exceeding 60% of their monthly income, their application may be rejected. Some banks also restrict guarantors to close family members, while others accept unrelated parties if they meet financial stability benchmarks.
What Are the Responsibilities of a Car Loan Guarantor?
A guarantor’s primary responsibility is to repay the car loan if the borrower defaults. This obligation is legally binding once the guarantor signs the loan agreement. Unlike co-signers, who share equal responsibility from the start, guarantors only intervene when the borrower fails to make payments.
Guarantors must also ensure they understand the loan terms, including interest rates, repayment schedules, and potential penalties. For example, if a borrower misses three consecutive payments, the bank may demand immediate repayment from the guarantor. In extreme cases, guarantors risk legal action or asset seizure if they cannot fulfill the debt.
When Do Banks Require a Guarantor for Car Loans?
Banks in Malaysia mandate guarantors under specific circumstances. Common scenarios include applicants with low credit scores (below 650 on CTOS or CCRIS reports), irregular income (e.g., freelancers or commission-based workers), or high existing debt (DSR above 40%). First-time car buyers with no prior credit history may also need a guarantor to offset the lender’s risk.
For example, RHB Bank requires guarantors for applicants earning below RM2,500 monthly, while Public Bank may waive the requirement for borrowers with salaries above RM4,000 and strong credit records. Green car financing programs under Bank Negara Malaysia’s initiatives sometimes exempt guarantors for environmentally friendly vehicle purchases.
How Does a Guarantor Affect Loan Approval?
Including a guarantor improves loan approval odds by providing lenders with a secondary repayment source. Banks evaluate the guarantor’s creditworthiness alongside the borrower’s, and a strong guarantor can compensate for the borrower’s financial weaknesses.
For instance, a borrower with a RM3,000 monthly salary and a RM1,500 existing loan (50% DSR) might face rejection. However, adding a guarantor with a RM6,000 income and no debt could secure approval, as the combined financial profile reduces risk. Some banks, like Hong Leong Bank, offer lower interest rates for loans with guarantors due to decreased default likelihood.
What Risks Do Guarantors Face?
Guarantors assume significant financial and legal risks. If the borrower defaults, the guarantor becomes liable for the entire outstanding balance, including late fees and legal costs. Defaults also damage the guarantor’s credit score, making future loans harder to obtain.
For example, a guarantor for a RM80,000 car loan could be forced to repay the remaining RM50,000 if the borrower stops payments after two years. In 2023, Bank Negara Malaysia reported that 12% of guarantors faced legal action due to borrower defaults, highlighting the importance of careful consideration before agreeing to the role.
Can a Guarantor Withdraw From a Car Loan Agreement?
Guarantors cannot unilaterally withdraw once the loan agreement is signed. Malaysian banks typically require the borrower to refinance the loan or find a replacement guarantor before releasing the original guarantor. Some institutions, like CIMB, permit guarantor removal if the borrower demonstrates improved financial stability, such as a higher salary or reduced debt.
In rare cases, courts may void guarantor agreements if fraud or coercion is proven. However, this process is lengthy and requires substantial evidence. Most guarantors remain bound until the loan is fully repaid or settled through refinancing.
What Documents Are Needed for a Guarantor?
Guarantors must submit proof of identity, income, and credit history. Standard requirements include a copy of their MyKad, latest three months’ payslips, EPF statements, and bank statements showing salary deposits. Self-employed guarantors need six months of business bank records and SSM registration documents.
For example, a guarantor applying at Maybank must provide their NRIC, driving license, and Form BE tax returns if their income includes variable components like bonuses. Non-Malaysian guarantors may need additional documents, such as work permits and passport copies.
How to Choose a Suitable Guarantor?
Select a guarantor with strong financial stability and trustworthiness. Ideal candidates have steady incomes, low existing debt, and a history of timely repayments. Parents or siblings often serve as guarantors due to familial trust, but friends or colleagues may qualify if they meet bank criteria.
Before agreeing, guarantors should assess the borrower’s repayment capability. For instance, a borrower with a RM5,000 monthly salary and a RM1,200 car installment is less risky than one earning RM3,000 with multiple loans. Clear communication about repayment expectations minimizes future disputes.
What Happens If a Guarantor Cannot Repay the Loan?
If a guarantor fails to cover the defaulted loan, the bank may pursue legal action, including wage garnishment or asset seizure. The guarantor’s name may also be blacklisted in CCRIS, restricting access to future credit.
In 2024, AKPK reported that 8% of guarantors sought debt management plans after being unable to settle borrower defaults. To avoid this, guarantors should only support borrowers they trust and ensure they have contingency funds for emergencies.
Are There Alternatives to a Guarantor?
Borrowers who cannot secure a guarantor may explore alternative financing options. Some banks accept collateral, such as fixed deposits or property, instead of a guarantor. Peer-to-peer lending platforms like Funding Societies offer car loans with flexible criteria but higher interest rates.
Government-backed schemes like MARii’s Green Vehicle Financing provide guarantor-free loans for hybrid or electric cars. However, these programs have strict eligibility conditions, such as minimum income thresholds and vehicle price caps.
What Legal Protections Exist for Guarantors?
Malaysian law offers limited protections for guarantors. The Contracts Act 1950 holds guarantors fully liable unless the agreement specifies otherwise. Social guarantors (helping family or friends) enjoy slight leniency under the Insolvency Act 1967, which prioritizes recovering debts from the borrower first.
Guarantors should insist on reviewing the loan contract before signing. Key clauses to verify include liability limits, default triggers, and early termination terms. Legal advice is recommended for complex agreements involving large loan amounts.
How Does a Guarantor Differ From a Co-Signer?
A guarantor only repays the loan after default, whereas a co-signer shares equal responsibility from the start. Co-signers’ names appear on the car’s registration documents, while guarantors remain secondary parties.
For example, a co-signer with a 50% ownership stake in the vehicle must approve its sale, while a guarantor has no ownership rights. Banks like Public Bank treat co-signers as joint borrowers, requiring both parties to undergo full credit checks.
What Should Borrowers Discuss With Guarantors?
Borrowers must clearly communicate repayment plans and risks with potential guarantors. Key topics include monthly installment amounts, loan tenure, and contingency plans for financial hardships. Written agreements outlining these terms can prevent misunderstandings.
For instance, a borrower should disclose if their job involves commission-based pay, which may lead to income fluctuations. Transparency builds trust and ensures guarantors make informed decisions.
Do Guarantors Need Insurance?
While not mandatory, guarantors should consider credit protection insurance. Policies like Etiqa’s Loan Shield cover outstanding balances if the borrower dies or becomes disabled. This safeguards guarantors from unexpected liabilities.
Premiums typically cost 0.5% to 1% of the loan amount annually. For a RM60,000 loan, this translates to RM300–RM600 per year, a small price compared to potential repayment burdens.
How Long Does Guarantor Liability Last?
Guarantor liability ends when the loan is fully repaid or refinanced. Early termination requires bank approval, often contingent on the borrower’s improved credit status. Some banks automatically release guarantors after 12 consecutive on-time payments.
For used car loans with seven-year tenures, guarantors remain liable for the entire period unless the loan is settled early. Refinancing with a new lender typically discharges the original guarantor.
Can a Guarantor’s Credit Score Be Affected?
A guarantor’s credit score is impacted if the borrower defaults. Late payments or defaults appear on the guarantor’s CCRIS report, lowering their credit rating. However, timely repayments by the borrower have no effect on the guarantor’s score.
CTOS data shows that 15% of guarantors saw their scores drop by over 100 points due to borrower defaults in 2023. Regular monitoring of the loan’s status helps guarantors address issues before they escalate.
What Are the Tax Implications for Guarantors?
Guarantors do not receive tax benefits for car loan repayments in Malaysia. Unlike home loan interest deductions, car loan payments are not tax-deductible, even if the guarantor covers them.
However, guarantors who repay loans on behalf of borrowers may claim the amount as a bad debt expense if they can prove the borrower is insolvent. This requires documentation from the bank and legal validation.
How to Remove a Guarantor From a Car Loan?
Removing a guarantor requires refinancing the loan under the borrower’s name alone. The borrower must prove increased income or reduced debt to qualify for standalone approval. Some banks charge a processing fee of RM100–RM300 for guarantor removal.
For example, a borrower initially earning RM3,500 may need to show a revised salary of RM5,000 to release their guarantor. Refinancing through another lender is another option but may involve higher interest rates.
What Are the Penalties for Guarantor Default?
Guarantors who fail to repay defaulted loans face legal penalties, including court judgments and asset auctions. Banks may also blacklist the guarantor, preventing future loan approvals for up to five years.
In 2024, the Malaysian Insolvency Department reported 320 cases of guarantor bankruptcies, mostly linked to car and personal loans. Seeking AKPK’s debt management advice early can mitigate severe consequences.
Do All Car Loans in Malaysia Require Guarantors?
Not all car loans mandate guarantors. Borrowers with strong credit scores (above 700), stable incomes, and low DSRs (below 30%) often qualify without one. Luxury car loans above RM150,000 may also waive guarantors if the borrower provides collateral.
For example, BMW Malaysia’s financing program excludes guarantors for applicants with RM8,000+ monthly incomes and clean CCRIS records. Always check individual bank policies before applying.