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19.07.2018

Guarantor Loans: Friendship Killers

Consumers have been warned they should think twice before taking out a guarantor loan or acting as a guarantor for a family member or friend who wants to take one out.

Pearse Flynn, a spokesperson for Creditfix, has said the loans are potentially “friendship killers and family destroyers”, with the levels of arrears being owed to the loans significantly increasing over the last 12 months.

The loans, which are normally offered to borrowers who have poor credit ratings, and usually can cost more than pay day loans, involve family members or friends acting as a guarantor for the borrower. This means if the person who borrowed the money cannot afford to pay back the loan in full, the lender can pursue the guarantor to recover the money.

However, the largest providers of the loans are now facing criticism, after an investigation by The Times newspaper.  They have reported that despite safeguards introduced by the Financial Conduct Authority, checks by some firms may still be failing.

Flaws in the system

One flaw in the system, it has been claimed, is when applying for loans, customers are often using online forms, which requires them to submit details of their income and expenditure.  However, when systems flag up warnings that loans may be unsuitable, customers can then amend the information until the system finds they are suitable.

Another claim is that borrowers are omitting information about what they are spending when completing the online form, such as smoking and clothing, to ensure loans look like they are affordable when they are not.

The biggest flaw in the systems, however, is many customers are presumed to be telling the truth, with no checks being carried out on wage slips or bank account statements to verify the information they are providing.  There are even examples of some firms’ presuming levels of expenditure, such as food, when customers have forgotten to include any amount.

However, those who defend the loans have hit back.  They have pointed out as little as 15 per cent of people who apply for loans get one, and over 90 per cent of the repayments being made are being repaid by the original borrowers. They also point out that without such models being used, many people would be denied access to credit and would be financially excluded as a result. They also point that they are not in the business of giving out loans that they don’t believe will be repaid.

Quick to Act

However, another criticism of the firms providing these loans is they are not slow in taking legal action when payments are missed, despite many claiming they do so only as a last resort.

Family and friends, who agree to act as guarantors for such loans, however, can often be surprised to find themselves being contacted within weeks of a missed payment, with debts then being transferred to debt recovery departments within a few months.  If the debt continues to remain unpaid, court action can be initiated within 30 days.

With hundreds of thousands of such loans believed to be outstanding, it is believed thousands are being taken to court each year.

The Risk for Guarantors

In many cases, although the original borrower will have no assets, such as a car, or savings, this is not always the case for family members and friends who act as guarantors.  Often, they can be elderly family members who own their home and have healthier credit ratings. Many don’t realise if a charging order is placed on their home or they are made bankrupt (in Scotland sequestrated) they could lose their home.

Pearse Flynn, speaking on behalf of Creditfix has cautioned,

“although the instinct of family members and friends is to help each other, when it comes to guarantor loans, acting as a guarantor is not always the best way to move forward.”

“There are reasons people must turn to guarantor loans. They are usually experiencing financial difficulties and are already over-indebted. Without the security of the guarantor these loans are often unsuitable.”

 “We would never say there are never circumstances when they are appropriate, but we often see vulnerable customers approach us when they weren’t.  Although we can help them, it is usually the guarantor that needs our help most. Understandably this can place a lot of strain on family relationships and friendships can breakdown.” 

At Creditfix, our advice is if you are approached by a family member or a friend, who asks if you will act as guarantor, is encourage them to get debt advice first.  Usually people turn to guarantor loans because they are already in debt and struggling, and taking out these loans can make matters worse, with the financial contagion of one bad loan spreading to other family members and friends.

In the UK there are other solutions available that can help people when someone is experiencing financial difficulty.  We would encourage people to seek advice first and explore all options, such as Individual Voluntary Arrangements and Debt Management Plans in England, Wales, and Northern Ireland; and in Scotland, Protected Trust Deeds and The Debt Arrangement Scheme.”

If you are thinking of taking out a guarantor loan, or are being pursued for one, speak with a Creditfix adviser first on 0808 2085 198.