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29/04/2019

Should I act as Guarantor for my son’s loan?

29/04/2019

Should I act as Guarantor for my son’s loan?

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Family finances are a delicate matter.

No one likes to see a loved one struggle with money and one of the most commonly asked questions we’re faced with is parents asking if they can act as a guarantor for a child’s loan.

One client recently asked: “Should I act as a guarantor for my son’s loan?

“He says because of his poor credit rating, he cannot borrow for a new car.  He needs the car for a new job and has said if I act as a guarantor, he can borrow the money.

He has promised he will make all the repayment”

This is a situation we’re hearing about more often from family members and friends of people who are trying to borrow money.

Before agreeing to commit to any financial promises, it’s important to be aware of what you’re signing yourself up for.

What is a guarantor loan?

Guarantor loans are types of loans that are often accessed by those that have low incomes and bad credit ratings and are usually for amounts that can range from £5,000 to £10,000.  The role of the guarantor is to underwrite the loan and give a guarantee that if the borrower cannot maintain the payments, they will make them.

However, the loans have recently become the focus of the UK’s Financial Regulator, the Financial Conduct Authority (FCA), which has found most guarantors will make at least one payment towards a loan when they act as guarantor. The FCA also fear that many of those who act as a guarantor do not understand the implications of providing a guarantee and give the undertaken without fully understanding the risks they are taking.  They also may not fully understand the borrower’s financial circumstances and whether they are able to afford the loan that they are taking out.

It is also not clear that the firms providing the loans are doing proper affordability checks to ensure guarantors can afford to repay the loan if they are called upon to do so.

Against this backdrop, it appears increasingly likely that the FCA will take steps to reign in firms providing the loans, like they have recently done so for payday lenders, rent to buy firms and doorstep lenders.

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Why do people give guarantees?

The reasons people give guarantees can be complex, but there is a growing fear that many of those giving guarantees are doing so under pressure from family members, friends, neighbours and even workmates.  Many may feel emotionally pressurised into doing so, whilst others may feel threatened by the borrower to give the guarantee. Some may even be the victim of a fraud, where the borrower gets the guarantor to give the guarantee, so they can get the loan, without ever having any intention of repaying it.

There are even cases where people have been persuaded online to act as a guarantor by people that have befriended them through social media, only for that person to then disappear once they have received the money.

The problem for the guarantor is they are then left with the debts and can have the debt enforced against them in exactly the same way it can be enforced against the borrower. That can mean a damaged credit rating and even a County Court Judgement (CCJ) being awarded against them.  This can result in bankruptcy or a charge being placed over their home.

How does the lender enforce a debt against a guarantor?

The Financial Conduct Authority has previously clarified the law in relation to guarantors and has made it clear the debt cannot be enforced against a guarantor without first issuing them with a formal default notice. This is to allow the guarantor the opportunity to remedy the default by making the payment before the account goes into default.

If a default notice has not been served and the lender intends to take payments from the guarantor, they must contact them first and inform them that they intend to do so. They must do this, even if they have the guarantor’s bank account details and a direct debit mandate has previously been set up. This is to allow the guarantor time to object and if necessary cancel the direct debit with their bank.

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Why guarantor loans are often not the correct option for borrowers?

Another aspect of guarantor loans that many borrowers don’t understand is that if they take out a loan, this may limit their options if they begin to experience financial difficulties.

It is not as straight forward as getting debt advice and then entering into a formal debt solution like an Individual Voluntary Arrangement, in England, Wales and Norther Ireland, or a Protected Trust Deed in Scotland.

This may deal with their liability, but it just passes the responsibility for paying the debt onto their family member or friend who acted as a guarantor.   This can often result in relationship breakdowns.

Should I take out a guarantor loan?

What we would advise, is if you are looking to borrow money and the only person prepared to lend to you is a firm that says you need to provide them with a guarantee, is seek advice first.

The fact, they are not prepared to lend to you is because they perceive you as a bad risk and want to ensure someone else will take the responsibility of paying the loan if you don’t.

You could not only be making your situation worse by borrowing money but also could create problems for the loved one that may be acting as your guarantor.

Equally if you are ever approached by someone who wants you to act as a guarantor, it would be wiser to direct them towards debt advice.  Not only is it likely that this will be more helpful for them, but the reality is they will be borrowing at interest rates greater than you would, if you borrowed the money yourself.

If you are worried about guarantor loans, either because you are thinking of taking one out or someone has asked you to act as a guarantor, call Creditfix on 0800 0431 431 for free, confidential advice.

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