Citizens Advice have been doing some campaigning about the problems with Guarantor loans. The issue is that some lenders are now asking for friends or family to guarantee loans for individuals who are struggling to make ends meet.
Why is that a problem?
Well, what usually happens when anyone finds it difficult to pay back money they owe is that they discuss the situation with the lender and come to an agreement about what they can afford to repay. This is usually backed up by a financial statement/budget sheet and a note of why they are in difficulties – perhaps they have lost their job, or are on sick pay, or they have split up with their partner etc. Often the lender can see that they can’t afford to go on paying and agrees to a smaller regular amount until things improve. However, with a guarantor loan, the person who is the Guarantor has agreed to pay whatever is owed if the person who lent the money can’t afford to repay. So, there is no need for the lender to agree to a reduced payment as they can just require the full amount from the Guarantor.
It seems that often the Guarantor can’t really afford to pay and hasn’t realised that they might be called on to pay the full amount owing – even if they did realise that they might have to pay if a month was missed. In the example in the press – the loan was for £10,000 and with interest, the repayments totalled £23,000. When the person who borrowed the money couldn’t afford to repay their relation was expected to find the full £23,000.
Citizens Advice are calling for a cap on the amount of money that can be lent under Guarantor loans so that this type of problem doesn’t arise. Obviously it is also important that anyone who might be asked to be a guarantor understands what they might be agreeing to….