Everyday Legal: Warning on risks from guarantor loans
Everyday Legal has already covered the issue of loan guarantors – click here to see our short film on this. However a warning on the risks from guarantor loans hit the headlines recently so the team at Everyday Legal thought it was worth having a closer look at these warnings and at the legal responsibilities of a loan guarantor.
Citizens Advice has recently issued a warning on guarantor loans, explaining that guarantor loans can result in friends and relatives who have acted as a guarantor being left with debts after signing up to guarantee loan repayments. A guarantor loan means that the borrower gives the name of a guarantor, often a friend or family member, who will be pursued if the borrower goes into arrears or defaults on the loan. The guarantor loan market is currently worth £154 million and more than 50,000 people took out a guarantor loan in 2013, with loans typically ranging from £1,000 to £7,500 and loan periods from 12 months to 5 years.
Criteria for guarantors (points to be aware of if you’re considering becoming a guarantor)
- A homeowner (but the loan is not secured on property) – this is because this indicates financial stability and means it’s unlikely that the guarantor will flee the country leaving the loan unpaid. It is sometimes possible to be a guarantor and not a homeowner if the guarantor has a good credit history.
- Aged 18-70
- Has a good credit record
- Can afford to repay the loan in the event that the borrower can’t
As a guarantor you need to be aware that the loan company would carry out a ‘soft search’ where it will check your credit history and your debt repayment history. This would be visible on your credit report but wouldn’t impact on your credit score. Also be aware, because guarantors are not regarded as ‘customers’ by the regulators they miss out on the basic protections most debtors would receive.
The report published by Citizens Advice states that 43% of guarantors were unsure of the extent of their responsibilities so it’s important to understand what those responsibilities are:
- The guarantor is responsible for loan payments if the borrower fails to make a payment
- The guarantor is responsible for the loan payments if the borrower goes into arrears
- The guarantor would become solely responsible for the loan payments if the borrower enters into an Individual Voluntary Arrangement* (IVA) or goes Bankrupt or dies and these payments would continue until the loan was completed.
Guarantors often receive monthly loan statements and details of how to access the loan account electronically. It makes sense to check the loan status regularly.
Citizens Advice is calling for the Financial Conduct Authority (FCA) to regulate guarantor loans and make a number of changes to address some of the issues with these loans. These proposed changes are:
- Guarantor loan lenders should include a liability warning on their promotional material
- Guarantors and borrowers should both be provided with a letter of agreement including a cooling off period when it is possible to withdraw from the loan
- Borrowers should be sign-posted to free independent debt advice by the lenders
*An Individual Voluntary Arrangement (IVA) is a legally binding contract between the borrower and the bank or credit card company. When a borrower takes up an IVA their debts are frozen and a formal proposal to settle outstanding debts within a set period is put in place.
Content correct at time of publication