Guarantor Loans ‘Potentially As Problematic As Payday Loans’

July 21, 2015

Loans backed up by guarantees given on behalf of borrowers are potentially as problematic as payday loans for anyone who finds their personal finance situation spiralling out of their control.

That’s according to the Citizens Advice charity, which is concerned by the apparent rise in prevalence of loans that are underpinned by guarantees of payment from the friends and family members of loan applicants.

Among the chief concerns for the charity is that more and more people are unwittingly becoming responsible for large amounts of debt as a result of being named as a guarantor on credit applications that are not their own.

A new report on the subject from Citizens Advice suggests that a large proportion of people who are named as guarantors in the context of loan applications have only a very limited idea of what their resulting responsibilities might be.

Another issue is that the guarantors in these circumstances are not considered officially to be ‘customers’ in a sense that would entitle them to a variety of legal protections as debtors.

With typical interest rates on guaranteed loans as high as 46.3 per cent, there are fears that such products could soon be “just as damaging” a source of financial difficulty as payday loans for consumers around the UK.

“Friends and relatives are unknowingly signing up to mountains of debt,” said Gillian Guy from Citizens Advice in a statement. “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 [by the Financial Conduct Authority] have been taken to try and tackle problems with payday loans, but other forms of credit still pose threats,” she said.

Earlier this year, the Financial Conduct Authority introduced a variety of regulatory measures designed to limit the extent to which payday loans can become a source of acute financial difficulty among British consumers.

According to Citizens Advice, the UK’s largest providers of guarantor loans increased their turnover by 30 per cent and their profits by 40 per cent between 2013 and 2014.

John Baird

Insolvency Adviser

Tel: 0800 063 9250

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