Citizens Advice warns on guarantor loans
A new report from the national charity warns about guarantor loans – which it says have the potential to be “just as damaging” as payday loans.
This type of loan sees a borrower give the name of a guarantor, normally a friend or family member, who is then pursued in the case of default or arrears.
The report said 43% of guarantors who sought help from Citizens Advice were unsure of the extent of their responsibilities. It also highlighted that guarantors can still be liable to pay off a debt even if the borrower has died.
The report adds that because guarantors are not regarded as customers by regulators, they miss out on basic protections most debtors would receive.
Citizens Advice said the loans, which have average interest rates of 46.3%, are often marketed at borrowers with poor credit histories, sometimes as so-called solution loans.
The number of people seeking payday loans is thought to have reduced since regulations were introduced by the Financial Conduct Authority last year – Citizens Advice welcomed this but warned that products like guarantor loans could be used more as an alternative.
Like payday loans, Citizens Advice is concerned preventative action by the FCA will not be taken on guarantor loans until it is too late for many people.
The guarantor loan market is now worth £154m and there are more than 50,000 people who took out a guarantor loan in 2013 (the latest year in which good data is available).
Figures show the largest lender’s turnover grew by 30% and its profit by 40% between 2013 and 2014.
The loans typically range from £1,000 to £7,500 and contracts can last from 12 to 60 months. This puts them out of the definition of high cost credit, but the charity warns they can be just as dangerous.
Gillian Guy, chief executive of Citizens Advice, said: “Friends and relatives are unknowingly signing up to mountains of debt.
“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.”
The 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; and providers should have to signpost borrowers to free independent debt advice.