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Family and friends taking on 'mountains of debt' as guarantors

Published 17/07/2015

Some 43% of loan guarantors who sought help from Citizens Advice were unsure of the extent of their responsibilities, the report found
Some 43% of loan guarantors who sought help from Citizens Advice were unsure of the extent of their responsibilities, the report found

Guarantor loans are saddling friends and relatives with "mountains of debt" and are potentially just as damaging as payday loans, a charity has warned.

Citizens Advice said those put forward as a guarantor on behalf of a borrower were unknowingly signing up to guarantee expensive loan repayments, and being pursued in the case of default or arrears.

The charity's report, A Problem Shared, said 43% of guarantors who sought help from Citizens Advice were unsure of the extent of their responsibilities.

It also highlighted that guarantors could still be liable to pay off a debt even if the borrower had died and warned that guarantors were not regarded as "customers" by regulators, therefore missing out on basic protections most debtors would receive.

Citizens Advice said the loans, which have average interest rates of 46.3%, were often marketed at borrowers with poor credit histories.

And while it welcomed figures suggesting the number of people seeking payday loans had reduced since the Financial Conduct Authority (FCA) introduced new regulations last year, it warned that products like guarantor loans could be used more as an alternative.

The charity raised concerns that, like payday loans, preventative action would not be taken on guarantor loans until it was too late for many borrowers.

The guarantor loan market was now worth £154 million, with more than 50,000 people taking out such a product in 2013, Citizens Advice said.

Figures showed the largest lender's turnover grew by 30% and its profit by 40% between 2013 and 2014.

Such loans typically ranged from £1,000 to £7,500 and contracts could last from 12 to 60 months, placing them out of the definition of high cost credit despite being potentially just as dangerous, the charity warned.

Citizens Advice chief executive Gillian Guy 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, such as requiring lenders to provide guarantors and borrowers with a letter of agreement including a cooling off period and a liability warning on their promotional material.

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