17th July 2015
Family members who become guarantors on expensive loans are being saddled with mountains of debt.
Citizens Advice has warned about guarantor loans which it said are ‘just as damaging as payday loans’.
This type of loan sees a borrower provide the name of a guarantor such as a family member or friend who will take over the payment of the loan should they default. Often this is the only way those with poor credit histories can gain access to borrowing.
However, if the borrower defaults or ends up in loan arrears, the guarantor is pursued for the cash. A report by Citizens Advice shows 43% of guarantors who sought help were unsure of the extent of their responsibilities.
Guarantors were also unaware that they are liable to pay off a debt even if the borrower has died.
As guarantors are not regarded as ‘customers’ by the City watchdog, the Financial Conduct Authority (FCA), they miss out on protections that most debtors receive.
Guarantor loans have average loan rates of 46.3% meaning the guarantor can see costs mount up quickly. The loans typically range from £1,000 to £7,500 and contracts can last from 12 months to 60 months, which puts them out of the definition of high cost credit like payday loans.
The guarantor loan market is now worth £154 million and 50,000 people took out these types of loan in 2013.
The largest guarantor lender’s turnover grew 30% and profit rose 40% between 2013 and 2014.
Citizens Advice said that the FCA’s tighter regulation of payday loans could mean more people turn to guarantor loans and is concerned that preventative action by the FCA will not be taken on these types of loan until it is too late.
Gillian Guy, chief executive of Citizens Advice, said guarantor loans may fall outside the scope of high cost credit loans but they can be just as dangerous.
‘Friends and relatives are unknowingly signing up to mountains of debt,’ she said. ‘Guarantor loans carry with them huge risks and our evidence shows people are getting involved without being fully aware of the dangers. It is positive that measures have been taken to try and tackle problems with payday loans, but other forms of credit still pose threats.
‘The FCA has the chance to act quickly to better regulate guarantor loans – it cannot wait for more people to fall into arrears or be taken to court before taking action.’
Citizens Advice wants the FCA to force lenders to provide guarantors and borrowers with a letter of agreement that should include a cooling off period in which they can withdraw from the loan.
It also wants lenders to include a liability warning in their promotional material and signpost borrowers to free, independent debt advice.