Guarantor loans: a ticking timebomb?
Guarantor loans are one of a number of alternative unsecured financial products that have gained in popularity since 2008. Borrowers are loaned money for a set period, and list a family member or friend as a guarantor. Guarantors are then pursued for the sum in the event of a default.
The guarantor loan market is now worth £154m; over 50,000 people took out a guarantor loan in 2013. While it’s still a relatively small industry at present, it has steadily grown since 2008, particularly in recent months as payday lenders have been subjected to stringent lending restrictions. Citizens Advice believes guarantor loans have the potential to be just as controversial and hazardous as payday loans.
The charity reports that 43 per cent of the guarantors who have contacted them for advice and support were unsure of the extent of their liabilities. Other key concerns are that guarantors are still liable to pay off debts in the event of a borrower’s death, and that guarantors miss out on basic protections most debtors would receive as they are not regarded as ‘customers’ by regulators.
Citizens Advice say the loans, which have average interest rates of 46.3 per cent, are often marketed at borrowers with poor credit histories. The charity is concerned that preventative action against guarantor loans will not be taken by the FCA until it is too late.
Guarantor loans typically range from £1,000 to £7,500. Contracts can last from a year to 60 months. While this means guarantor loans are not defined as a high cost credit product, Citizens Advice warns that they can be just as dangerous.
The organisation recommends the FCA take a number of steps, including requiring lenders to provide guarantors and borrowers with a letter of agreement, include liability warnings on promotional material and direct borrowers to free independent debt advice.
“Friends and relatives are unknowingly signing up to mountains of debt,” said Gillian Guy, chief executive of Citizens Advice.
“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.”