Guarantors must consider the full implications of signing off on a loan. While side agreements might add protection, there are other ways to help those in need.
Debt default could cost you more than a friend
Amy Garner has lived in Abu Dhabi for the past 12 years. Originally from South Africa, she has enjoyed a good life so far, earning a steady income as a nurse. In January last year, as the recession continued to hit the UAE, a close friend lost her job. In need of a place to stay, Ms Garner offered up her home for three months as her friend tried to get back on her feet. But then Ms Garner did something she would later regret - she signed on as a guarantor for a Dh200,000 loan.
"This is a person I considered a close friend," Ms Garner says. "I have known her for almost 30 years. We went to nursing school together and then left South Africa to go to work in Kuwait. "We kept in touch all along until we both came to work in the UAE in 1998." At first, it seemed as if Ms Garner's friend would make good on the loan. Within a few weeks, her guest landed another job. She was then asked by her new employer to exit the UAE so they could issue a new visa.
But by this time, her friend had lagged behind in her loan repayments due to a lack of employment. After she exited the country, the new company became aware of the debt problem and decided not to process her visa. So without a visa and employment, her friend was unable to return to the UAE and instead headed home to South Africa. Last July, 14 months since her friend left the country, Ms Garner was contacted by a bank informing her that she had defaulted on a Dh200,000 loan.
She was told that the bank had tried to trace her friend to secure continued payments for the loan, but without success. And because Ms Garner had signed her friend's loan papers and provided a copy of her passport, the liability now rested with her. "I was so shocked when I heard from the bank," she says. "I thought my friend would take care of her responsibilities. In fact, I had forgotten that I had guaranteed a loan for her."
The bank demanded that Ms Garner immediately service the loan on her friend's behalf or face a court case and an exit ban until a resolution could be reached. Ms Garner's experience, which is not an isolated case in these difficult economic times, highlights the trials of mixing friendship with money. "When it comes to guaranteeing another person's loan, the issue is more of an emotional one than rational," says Kevin Brandon, a London-based independent financial counsellor. "You look at the other person and you are caught up in the emotion of the situation. You feel sorry for the other person and, without any rational thinking, you accept to sign the papers."
Guaranteeing another person's loan poses tremendous risks as there is no assurance that the recipient will make good on their intentions. Unfortunately, even trusted friends can get in difficult situations and fail to meet their responsibilities. "If you guarantee a loan for someone else, you need to have a side agreement with the individual to have something in writing in clear terms as to the details of what each of you are agreeing to," says Sara Lord, a financial planning director at Killik and Company in Dubai. According to Ms Lord, you can even ask for some form of collateral to strengthen the side agreement.
"In principle, people should not guarantee others without carefully and rationally thinking about it," Mr Brandon adds. "They should have the courage to say no to a friend or relative when they have to, and have peace of mind that they have done the right thing." That said, he points out that it's important to offer emotional support for people in distressed situations. According to Mr Brandon, there are other ways to help instead of guaranteeing loans.
"You can help them sell off some of their belongings to raise the cash," he says. "You can help them find work or you can take them to financial advisers to get professional help." For Junil Camilo, seeking a loan from family and friends was never an option. "It is difficult nowadays to borrow from family or friends as everyone now says they have a personal recession," says Mr Camilo, a Filipino who recently took out a car loan with a bank.
"I had saved up to buy a car and was Dh2,000 short, but nobody was ready to lend me that much. So I decided to take a bank loan for the full amount." In an ideal world, he says he prefers borrowing from family or friends, mainly because lending practices at banks can be difficult for him to manage. Indeed, financial institutions have introduced stricter credit guidelines since the economic crisis saw an increase in loan defaulters.
According to R Sivaram, the senior vice president of the retail cards division at Emirates NBD, the bank is currently limiting the number of cards offered to customers based on their credit history. Regular industry practices of lending in the UAE are based on a customer's income, age, occupation, current liabilities and past payment history. Applicants are also required to submit income documents.
On a wider scale, a Dubai law now requires local and international lenders to share information on their customers within the UAE with the credit bureau Emcredit. And in March last year, the Federal National Council approved a federal credit information law that is yet to be passed. Mr Sivaram adds that the banking community appears to be divided on the issue of the establishment of a personal bankruptcy law.
"On the one hand, personal bankruptcy laws could encourage consumers to over-leverage themselves, which could have an adverse impact in down markets," he says. "On the other hand, it could help distressed borrowers to restructure their debts and find remedies to repay borrowings without having a criminal suit filed against them." In the meantime, some banks, such as Emirates NBD, are offering amicable solutions to customers, such as extended payment plans and the restructuring of liabilities.
Unfortunately, with many people losing their jobs or having their salaries cut, issues arising from debt often end up in court. Ms Garner's case is now in court, and her passport has been confiscated pending a private agreement between her and the bank, or a court decision on the case filed against her. In an attempt to resolve the situation, the bank has asked that she transfer a Dh65,000 car loan she took out in May this year and consolidate it with her friend's debt, leaving one liability to service. Ms Garner did not accept the offer because, by doing so, she will assume full responsibility for her friend's loan.
She has tried many times to contact her friend in South Africa, but the calls have gone unanswered. She believes her friend has no intention of owning up to her responsibility. Now, Ms Garner faces a possible jail sentence. "The bottom line is that it's a dangerous thing to guarantee payment for someone's debts," says Mr Brandon. @Email:email@example.com