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Guarantor Loans Under The Microscope

22nd July 2015

What is a Guarantor Loan?

Guarantor loans are targeted towards borrowers with less than perfect credit histories. Because the lender isn’t especially confident that the loan will be repaid, they require that a second person provides a “guarantee” of repayment. The borrower will usually find a relative or friend who is prepared to provide this guarantee.

The loans are typically provided at relatively high rates of interest. The amounts lent are often larger than payday loans with associated repayment schedules that can stretch out over several years. It’s believed that around 50,000 such loans are provided each year in the UK.

In the event that the loan isn’t repaid as agreed, the lender may approach the guarantor for repayment. This can mean that a guarantor has to find and repay thousands of pounds, could be chased by debt collectors, or could even finds themselves in court.

Recent Criticisms of Guarantor Loans

Citizens Advice is concerned that loan guarantors aren’t being adequately protected. Their recent survey found that nearly 50% of guarantors failed to appreciate the extent of the responsibilities.

Some of the dangers include:

  • Financial regulators not truly viewing loan guarantors as being “customers” in the same way that they view the primary borrower.

  • This type of lending doesn’t always benefit from the interest cap imposed recently on payday lenders – meaning that debts can escalate quickly.

  • Guarantors may not receive cooling off periods, liability warnings, or information about sources of debt advice when debts fall into arrears.

  • Guarantors may not also be fully aware of the scope of their responsibilities – for example repaying the debt in the event that the borrower was to die.

The Financial Conduct Authority appears to appreciate that there are deficiencies in the way that loan guarantors are currently protected. It’s expected that loan providers will be directed to provide further protections to guarantors in the near future. 

Guarantor Loans Being Included In Trust Deeds

If you enter into a trust deed in Scotland you must provide the insolvency practitioner with details about all of your debts. This includes any guarantor loans you have taken out. The same principle applies in terms of sequestration (bankruptcy) and the debt arrangement scheme.

Because entering a formal debt arrangement will disrupt your debt repayments, it’s likely that the lender will begin to chase your loan guarantor for repayment. This could prove to be embarrassing for you and financially difficult for the provider of the guarantee.

If You Are A Loan Guarantor And You’re In A Trust Deed

If you’ve guaranteed a debt, and the lender is now chasing you for repayment, make sure that you inform your trustee. This new debt should become a creditor in your protected trust deed. You will therefore not normally have to pay this debt separately (provided that the guarantee was given before the trust deed began).

The same principle applies in respect of sequestration (bankruptcy) and debt arrangement schemes in Scotland.

Getting Guarantor Loans After A Trust Deed In Scotland

It’s likely that your credit rating will very poor for a while after being discharged from a trust deed. This could make borrowing from mainstream lenders almost impossible.

If you consider that you really need to borrow money, a guarantor loan might be one option that is available to you. Because the loan is guaranteed by another person, and because the interest rate may be relatively high, a lender may be more inclined to accept the perceived risk of lending to you.

We recommend that you ensure that your guarantor is fully aware of the risks to them if something unexpected was to happen to you. Could they manage financially if they had to repay this debt in full? It may be unfair to ask them to take on this responsibility if they could not.

More Information

If you’re facing a debt problem, as a borrower or as a loan guarantor, our professionally qualified debt advisers can help you. Please call 0141 249 0416 or complete our online contact form.

You can also ask questions in our forum – register to post in the forum today here.

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Wylie & Bisset Grant Thornton

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Data Protection Registration: Z1332750