Guarantor loans

Some lenders will only provide a loan to borrowers if another person (for example, a friend or relative) guarantees to make the payments if the borrower doesn't. The other person providing this guarantee is known as a guarantor. So this type of lending is sometimes called a ‘guarantor loan’.

Most of the complaints we see are about what happened at the time the loan was provided. So this note is mainly to do with complaints where a borrower says they shouldn’t have been given a loan, or the guarantor says they shouldn’t have been accepted, or didn’t agree to be a guarantor. This note doesn’t cover complaints by guarantors of loans to businesses.

Complaints made by borrowers:

• I shouldn’t have been given the loan because I couldn’t afford it and the lender should have known this at the time.
• My financial circumstances have changed and I can no longer afford to make the repayments to my loan but the lender isn’t treating me fairly.
• I didn’t apply for the loan.
• The lender won’t let me include this loan in an Individual Voluntary Arrangement (‘IVA’) or bankruptcy.
• I’m having problems with their credit file because of the loan.
• My guarantor has been contacted too quickly.

Complaints made by guarantors:

• I didn’t agree to be a guarantor.
• I was pressured or forced into being a guarantor.
• It wasn’t properly explained that being a guarantor meant I had to make the payments if the borrower didn’t.
• The lender should never have accepted me as a guarantor because I couldn’t afford to make the payments.
• The lender should never have given the loan to the borrower in the first place.
• My circumstances have changed and I can no longer afford to make the payments.
• The lender is threatening to take me to court.
• The lender is pestering me for payment.

As with any complaint, we’ll expect you to work with your customer to get to the bottom of what happened, investigate fairly whether anything went wrong, and – where appropriate – take steps to put things right.

If you don’t reply within the time limits for responding to a complaint, or the customer disagrees with your response, they can bring their complaint to us. We’ll check it’s something we can deal with, and if it is, we’ll investigate.

We’ll expect you to be able to show us that you’ve investigated the complaint thoroughly, and have reflected carefully on the circumstances.

Find out more about how to resolve a complaint.

In the same way as for other types of complaint, when a consumer contacts us about guarantor lending we’ll ask:

• Did the business do everything it was required to do?
• And if they didn’t, has their customer lost out as a result?

As with every case, our answer to a complaint will reflect what’s fair and reasonable in the circumstances. And in considering what’s fair and reasonable, we’ll consider relevant law and regulation, regulators’ rules, guidance and standards, codes of practice, and what we consider to be good industry practice at the time.

If there are disagreements about the facts, we’ll make our decision about what probably happened using evidence provided by you, your customer and relevant third parties.

Complaints by borrowers of unaffordable or irresponsible lending 

When a borrower complains about irresponsible guarantor lending, we’ll ask questions such as:

• Did the lender complete reasonable and proportionate checks to satisfy itself that the borrower would be able to repay any loans in a sustainable way?
• If reasonable and proportionate checks were completed, was a fair lending decision made?
• If reasonable and proportionate checks weren’t carried out, what would reasonable and proportionate checks more likely than not have shown?
• In the circumstances, at the time of each application, was there a point where the lender ought reasonably to have realised it was increasing the borrower’s indebtedness in a way that was unsustainable or otherwise harmful and so shouldn’t have provided further loans?
• Did the lender act unfairly or unreasonably in some other way?

Complaints made by guarantors

When a guarantor complains that they’re unfairly being asked to make loan payments, we’ll ask questions such as:

• Did the lender complete reasonable and proportionate checks to satisfy itself that the borrower would be able to repay the loan in a sustainable way?
• If reasonable and proportionate checks were completed was a fair lending decision made?
• If reasonable and proportionate checks weren’t carried out, what would reasonable and proportionate checks more likely than not have shown?
• Did the lender obtain the guarantor’s properly informed consent to being a guarantor?
• Did the lender complete reasonable and proportionate checks to satisfy itself that the guarantor would be able to repay the loan if the borrower didn’t?
• If reasonable and proportionate checks were completed, was a fair lending decision made?
• If reasonable and proportionate checks weren’t carried out, what would reasonable and proportionate checks more likely than not have shown?
• Did the lender act unfairly or unreasonably in some other way?

The main law, rules and other standards that apply

This information isn’t exhaustive, but there are several important laws, rules and standards that lenders need to consider – and which they and we will need to take account of when looking into customer complaints.

In summary, it’s clear from both the OFT’s Irresponsible Lending Guidance and the FCA’s Consumer Credit Sourcebook (CONC) that both regulators required an assessment of affordability that was proportionate – to determine if a prospective borrower would be able to repay their loan. And both regulators provided guidance that lenders could consider when completing this assessment.

Find out more about our approach to complaints about unaffordable lending.

In addition, since November 2015, CONC has also required guarantor loan providers to carry out a similar affordability assessment on a prospective guarantor to ensure they will be able to make the loan repayments if they have to. These provisions also say that the existence of a guarantee doesn’t lessen the requirement for proportionate checks on the borrower.

CONC also says a lender needs to provide an adequate explanation to the consumer before accepting them as a guarantor. To be adequate, the explanation must, at least, cover:

• the circumstances in which the guarantee may be called on
• the implications for the guarantor if the guarantee is called upon

When thinking about whether or not a lender’s explanation was adequate, we look at:

• the channel or medium the explanation took place on
• the actual and potential costs of the loan
• the risks to the guarantor

We expect a lender to have provided a guarantor with a fair and reasonable understanding of what’s expected of them under the terms of the guarantee. And where legal consequences – such as charging or attachment of earnings orders – are a realistic possibility, we expect the lender to explain what these are.

Equally, if a lender relies on information provided by more than one medium (for example, in an online application and by phone), inconsistencies in that information  are more likely to lead to us saying that the lender acted unfairly and/or unreasonably, and that it didn’t provide an adequate explanation. 

If we think something went wrong and the borrower lost out as a result, we typically say the lender should refund the interest and charges their customer paid, plus 8% simple interest.

Our starting point is that the borrower has had the benefit of the money they borrowed and it’s fair they should pay it back. So if a borrower has a complaint upheld and there’s still an outstanding balance on the credit, we’ll usually tell the lender to remove all the interest and charges applied from the start – so that a new starting balance of only the amount lent is left – and then deduct any payments already made. If this results in the borrower having paid too much, any overpayments should be refunded plus 8% simple interest.

Sometimes there’ll still be an outstanding balance even after all adjustments have been made. We’ll usually say it is fair for the lender to ask for this amount to be repaid. But in some circumstances we won’t think this is fair.

One example might be where the lender had enough to know that providing funds to the borrower was so clearly unsustainable that there was no realistic prospect of repayment. Another might be where repaying any outstanding amount would cause the borrower financial hardship.

We’re also likely to tell a lender to make sure their customer’s credit file doesn’t have any adverse information recorded about the loan if we’ve found that proportionate checks would have shown that the borrower couldn’t sustainably repay it. If we decide that there came a point where the lender should have realised that any further lending was clearly unsustainable, we’re likely to tell the lender to get this further lending removed from their customer’s credit file completely.

We may also award the borrower additional compensation if we think they were caused distress and inconvenience – especially if we find that the lender acted unfairly or unreasonably towards them in some other way.

Complaints where we agree a consumer shouldn’t have been accepted as guarantor for a loan 

It may be that we think a consumer was unfairly accepted as a guarantor – either because the lender didn’t fairly obtain the consumer’s consent, or because reasonable and proportionate checks would more likely than not have shown that the guarantor couldn’t sustainably repay the loan. If so, we’re likely to say that the consumer should be released from the guarantee and refunded any payments they've made plus interest. 

We may also award the guarantor additional compensation if we think they were caused distress or inconvenience – especially if we find that the lender acted unfairly or unreasonably towards them in some other way.

We’d also usually ask for any information added to the guarantor’s credit file to be removed.

If you want to talk informally about a complaint you've received, you can speak to our Business Support Hub. They can give general information on how the Financial Ombudsman might look at a particular complaint. We also offer guidance on our rules and how we work.

Find out how to contact the Business Support Hub.

You may find it useful to look at the The Consumer Credit Sourcebook (CONC) when you’re dealing with these types of complaint. 

If you’re a consumer looking for information on complaints about guarantor loans, you can read more about this on our dedicated information page for consumers or to make a complaint, find out more about how to complain.