Guarantor loans "just as damaging" as payday loans

Charity warns friends and family not fully aware of dangers when guaranteeing debts.

Friends and family of borrowers are unwittingly signing up to huge debts by agreeing to guarantee expensive loans for them, according to Citizens Advice.

The charity warns in a new report called A Problem Shared that the growing guarantor loans market has the potential to be “just as damaging” as payday loans once were.

The problems

Guarantor loans allow people with poor credit histories to borrow, so long as they can get a friend or family member to promise to step in and pay back the debt if they fail to do so. On average they charge around 46.3% according to Citizens Advice, allow people to borrow from £1,000 to £7,500 and can be taken out over terms of one to five years.

But the report reveals 43% of guarantors who sought help with Citizens Advice were unsure of how far their responsibilities went. Those who agree to guarantee loans can be pursued by debt collectors if the borrower defaults or falls into arrears and are liable even if the borrower dies.

"Guarantor loans carry with them huge risks, and our evidence shows people are getting involved without being fully aware of the dangers," said Gillian Guy, the chief executive of Citizens Advice.

The report also warns that as guarantors are not seen as ‘customers’ by regulators, they are missing out on basic protections most debtors would receive with conventional loans.

Preventative action

Citizens Advice is concerned that the drop in the number of people seeking payday loans following stricter regulation could mean products like guarantor loans will be used as an alternative.

In January, the Financial Conduct Authority (FCA) introduced new rules covering payday loans in an attempt to protect borrowers, after it found many were dragged into debt using the expensive short-term loans to make ends meet.

Citizens Advice says preventative action is needed by the FCA before it’s too late for those who are turning to guarantor lending, as the products have the potential to be “just as damaging” as payday loans.

Guarantor loans are often marketed to those with poor credit histories as a ‘solution’ deal and the growing market is worth £154 million, with an estimated 50,000 people taking one out in 2013.

Guy said: “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.”

Recommendations

The Citizens Advice report recommends the FCA take a number of steps, including:

• Requiring lenders to provide guarantors and borrowers with a letter of agreement, including a cooling off period in which they can withdraw from the loan.
• Guarantor loan providers should be required to include a liability warning on their promotional material.
• Providers should have to signpost borrowers to free independent debt advice.

The FCA welcomed the Citizens Advice report and said it would be taken into account as it develops policy and supervisory approaches to the problem.

The regulator consulted in February to make amendments to the rules in relation to guarantor lending to address gaps and anomalies. It plans to publish a policy statement with the final rules and guidance in the next couple of months.

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