If a relative or friend asks you to guarantee a loan they’re taking out, the safest answer is “no”.
These guarantor loans are growing in popularity. The money is lent by specialist firms to people with bad credit scores who would find it difficult or impossible to get a loan from a bank.
These firms will lend them money at a high rate of interest but only if another person, a guarantor, who is a better risk, takes on joint liability for the loan.
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Rates of interest are normally 49.9 per cent. So someone borrowing £2,000 over three years would end up paying £3,500 back.
If the borrower fails to meet a payment then the guarantor will be pursued for it and may have to repay the whole amount borrowed plus interest.
Ultimately, the debt could be recovered from the guarantor through the courts, and if they are a homeowner it’s effectively secured on their home.
However much you love the person asking you – remember that the guarantee is needed because the lender does not think the borrower is a good risk. That means the chances of them failing to pay are high – and so are the chances you will end up paying.
The Financial Conduct Authority was so worried about these loans that it introduced new rules last November. Now the lender has to consider the potential impact on the person giving the guarantee as well as assessing if the borrower can afford it.
Despite these tough new conditions, figures released by the Financial Ombudsman Service for the first quarter of this year show that the number of complaints about guarantor lenders have doubled in a year and it now upholds more than four out of five of them, compared with only one in three a year earlier. The rate of upheld complaints is now the highest for any product category.
If you have been a guarantor and pursued for a debt, consider if you were fully informed of your obligations before you agreed.
If the deal was mis-sold to you or the borrower, complain to the lender. If it’s not resolved in eight weeks then take the complaint to financial-ombudsman.org.uk.