When Arvind Mani (name changed) ditched his Dubai home loan during the meltdown of 2009 and fled back home to India, marketing professional Satish Pillai (name changed), who had signed up as a guarantor for Mani’s home loan, saw the noose tightening around his neck. Within two months, Pillai had also packed his bags and returned to India before the lenders could lay their hands on him. “Thankfully, Mani had taken the loan from a local bank and not from an Indian institution’s Dubai office. Otherwise they would have chased me to my home in Kerala,” Pillai says.
When a relative, a close friend or even an old colleague requests you to sign as a guarantor so they can qualify for a home loan, it can present quite a dilemma, considering the legal implications. Om Ahuja, CEO — Residential Services, Jones Lang LaSalle, says that becoming a guarantor should be a well-thought-out decision.
Of course only a small percentage of homeowners default on their loans. A spokesperson for a leading Indian home finance company that has offices in the UAE says that the guarantor’s role is more of a formality, which puts subtle pressure on the borrower to pay up rather than default. “It is [usually] in cases of fraud or if the developer just doesn’t deliver the home to the buyer that things get messy,” the spokesperson says, adding that in such cases the borrower and guarantor are themselves victims of wrongdoing, and the loan becomes an additional burden on both.
Even for banks — and their recovery agencies — holding the guarantor responsible for paying up the dues is an unpleasant, though legally binding, task. “It’s always a sticky situation dealing with guarantors, but we have to hold them responsible when the borrower just won’t pay up,” says Andy Yiacoumi, Managing Consultant at Dubai’s Decol Debt Collections, adding that the best legal safeguard for guarantors is not to sign up at all.
So what do you do as a guarantor if the borrower defaults on the loan? The bank is legally entitled to pursue the guarantor for repayment of the loan, so little will be achieved by confronting the bank in such a situation.
Instead, follow up with the borrower and try to find out what caused the default in repayment. Sometimes it may simply be a case of financial mismanagement or ignorance, which can be rectified with advice and the help of an accountant or financial consultant.
But overall, no kind of loan should be taken or stood guarantor for without a firm understanding of all the factors involved, because at the end of the day, as Ahuja says, “A guarantor to somebody else’s indebtedness becomes financially liable in the case of default, without having gained any of the advantages afforded to the borrower.”
Andy Yiacoumi – Guest speaker during the annual FCIB Conference held in Madrid, Spain.