John Wightman, Ombudsman Leader and Head of Practice, explains what it means to be a guarantor on a guarantor loan.
I was recently invited to take part in a panel discussion on BBC Radio 4’s Money Box show. The programme focussed on what it means to be a guarantor, either on a loan, a mortgage or a tenancy agreement. 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 does not, this other person is known as a guarantor.
It emerged from the calls and the experience of other panellists that sometimes guarantors don’t fully understand what being a guarantor means. So, I wanted to share five key things that anyone thinking about agreeing to guarantee a loan should consider.
1
Do you know the financial liability you are taking on?
When you agree to become a guarantor, your role is a lot more than simply vouching for your friend or loved one. You are accepting a formal legal and financial responsibility to make payments on their behalf in full.
2
Are you confident that the borrower can make the repayments without your help?
Rules require lenders, or those who provide credit, to check that the borrower and guarantor can each afford the repayment individually. Even though guarantors should be able to rely on lenders to properly check that the borrower can afford the loan, it is important for guarantors to look into this themselves with the borrower before the loan starts. Remember, if someone is asking you to be their guarantor, it’s fine to want to see for yourself what financial situation they are in.
3
Do you know how or when you will be asked to step in?
Lenders have to formally default the borrower, which means there has been a failure to meet the legal obligations of the loan, before the guarantor is legally required to step in. But many guarantors face a dilemma about whether to make repayments before that point. This could be partly to protect the borrower from default, and partly to prevent large amounts of missed payments, or arrears, building up which a guarantor might later have to pay in one go (possibly with interest).
So, before agreeing to be a guarantor, you might want to check with the lender:
- when and how they will inform you of any missed payments
- how they will work with the borrower to get back on track before forcing the guarantor to make payments
- how long you will have to catch up the loan repayments if arrears have built up
4
Are you comfortable with the risks that being a guarantor poses to your finances?
In the event that the borrower fails to make repayments on their loan, you will be expected to step in. That will have a direct financial cost to you. If arrears have built up this may involve having to pay off a lump sum in a short space of time, as well as picking up a regular monthly payment for the remaining duration of the loan.
As well as a cost in pounds and pence, this can have a negative impact on your credit file, which is a database used by lenders to assess your creditworthiness. Negative markers on your credit file might remain visible to other lenders for years and can affect your ability to access credit, such as loans, credit cards, and mortgages, for yourself. And in the worst cases, all the legal mechanisms available to anyone enforcing a debt through court can be applied to a guarantor.
5
Have you considered the risks that being a guarantor poses to your relationship?
It is easy to focus on the financial and legal implications of being a guarantor. But these agreements are also underpinned by friendships and family ties.
Sadly, through the cases we see, relationships and friendships can come under strain and can even break down completely when things go wrong. As difficult as it is to decline a request to act as a guarantor, callers to the programme explained that they wished they had said no when originally asked, or were glad they had said no in the first place.
How we can help
Taking steps to get answers to these questions for yourself will help you make the best decision for you about becoming a guarantor. But lenders also have a duty to check the loan is affordable and provide you with the information you need.
If you think a lender has fallen short, or not treated you fairly, we may be able to help. You can see more about how we look at complaints about guarantor loans on our website.
