With a guarantor deal, a creditworthy friend or family members agrees to provide security for someone else’s repayments.
They have to agree to do this so that the high-risk borrower can get the deal.
However, the loan repayments that they are effectively “under-writing” are often very expensive.
People unaware of what they are signing up to
In a new report, Citizens Advice warns that many people who have agreed to these arrangements are unaware of their full obligations, and have no idea they must pay the loans if the friend or relative gets into difficultly and defaults.
Just how expensive are the loans?
The loans tend to range from £1,000 to £7,500 and can last from 12 to 60 months.
On average, these loans can have interest rates of a huge 46.3 per cent.
Citizens Advice has warned that on occasions, guarantor loan deals have the potential be just as harmful as payday loans.
How can I check my credit report?
Beware of a loophole in the law
While borrowers who take out these loans are protected from being hounded by debt collectors, this is not the case for the friends and relatives who have signed up to act as guarantors.
As these individuals are not viewed as “customers,” they aren’t covered by basic protections.
This means they can be pursued by lenders over defaults and arrears.
Worse, they can still be chased for money owed, even if the borrower has died.
Read our tips for clearing your debts.
Guarantor loans have become more popular
Guarantor loans have grown increasingly popular in recent years, and the market is now worth £154 million.
Figures also show that more than 50,000 people took out one of these loans in 2013 (the last year in which good data is available).
People with poor credit records are targeted
Just like payday loans, these products are often aimed at people with poor credit records who cannot borrow money elsewhere; they are sometimes marketed as “solution” loans.
There are also fears that lenders will use these loans as an alternative to payday loans since the crackdown which resulted in interest rates being capped.
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Make sure you are aware of the dangers
Campaigners are calling for better regulation of guarantor loans including letters of agreement, a cooling-off period so guarantors can withdraw from loans, and a liability warning on promotional material.
In the meantime, given these loans carry huge risks, it is essential that you understand the dangers before agreeing to get involved.
Have you considered consolidating your existing debt with a loan?
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