The popularity of guarantor loans has skyrocketed in recent years. But the method of borrowing, which involves a third party underwriting repayments, has hit the headlines during the coronavirus pandemic. Why is this, and what options do you have?
Guarantor Loans – the Current Picture
As the end of 2020 has been and gone, the guarantor loan landscape has become increasingly complicated. As a result, one of the biggest lenders of this type of product, Amigo Loans, has paused offering new loans until some time in 2021.
In November, Amigo reported a spike in complaints about its guarantor loans. Reported issues to the company and the Financial Ombudsman centred on affordability and mis-selling concerns. Amigo has been working through the backlog and, on September 30th, had paid out £47m in compensation to customers.
Elsewhere, new figures from the Ombudsman revealed that complaints about guarantor loans in the wider market had increased by almost 300% in quarter two as the COVID-19 crisis deepened. The financial watchdog upheld an astonishing 88% of those complaints.
How a Guarantor Loan Works
A guarantor loan is an unsecured personal loan where the repayments are ‘guaranteed’ by another person – the Guarantor.
The guarantor essentially undertakes to repay the loan by acting as a back-up to the borrower. Thus, the guarantor will be called upon to repay the loan if the borrower does not keep up repayments as agreed.
Guarantor loans are generally an expensive way to borrow. Interest rates are typically around 50% APR. This is not as high as with payday loans, but like short-term loans, guarantor loans are approved quickly, typically within 24 hours. Guarantor loans are marketed to borrowers with poor credit histories.
What Can Go Wrong With a Guarantor Loan?
Lenders are presently readying themselves for an unprecedented surge in defaulted loans in the post-COVID economic turmoil which lies ahead. But it is also highly likely that the demand for guarantor loans will rise.
A guarantor for any loan is equally responsible as the borrower to ensure the repayment of the loan. Therefore, any default on the loan will affect the guarantor’s credit score and that of the person whose name was principally on the agreement.
A borrower will be entitled to complain about a guarantor loan if:
- Proper checks would have demonstrated they could not repay the loan;
- They would have been unable to afford the repayments without borrowing more;
- The lender did not check that your income and expenditure figures looked reasonable;
- You were self-employed or had wages that varied, and the lender did not look at how your income went up and down;
- Couldn’t afford to repay the loan without difficulty;
- Were pressured into becoming the guarantor;
- Didn’t understand the implications of being a guarantor.
- Does the loan leave you so short that you have fallen behind with bills?
- Do you need to borrow more to keep up with repayments?
- Has your lender failed to act positively or sympathetically when you could no longer afford the loan repayments due to a change in circumstances?
- Has your lender used debt collection agencies without first offering other fair solutions?
- Has your guarantor been asked to make repayments on the loan too quickly? Say before you missed a repayment;
- You couldn’t reasonably afford the payments when you agreed to be a guarantor;
- Did the lender fail to communicate what being a guarantor meant clearly?
- Did the lender fail to tell you that the borrower was taking top-up loans? The lender can not assume you were happy to also act as guarantor for additional monies borrowed under the loan;
- Were you pressured into becoming a guarantor?
- Did you have other financial links with the borrower that the lender did not consider?
- You are refunded the interest paid plus any charges and fees applied to the account;
- You won’t get the original loan amount refunded. You will still have to pay the original loan amount back since you have already benefited from the loan itself. This means you may be left with an outstanding balance;
- You can claim interest on the total amount refunded. On top of the refund, you can claim 8% interest per year on payments from the date they were paid to the date of settlement;
- You can request that negative entries on your credit report be removed for any loans deemed ‘unaffordable’.
- You could be released from the responsibility as a guarantor;
- A refund of any payments you’ve made on the borrower’s behalf;
- You get interest back on top of the total amount of your refund;
- Your credit file will be adjusted.
Merely making the payments doesn’t prove the loan was affordable. You may have been repaying with difficulty or taking out other loans. And this may have been because you didn’t want your guarantor to be affected by not repaying.
You can complain if you are still paying the loan or if you have repaid it all. However, the loan should also have been affordable for you and was not taken out on the assumption that the guarantor was well off.
If you raise a complaint as a borrower, then the complaint will not affect your guarantor, and they will not be told unless you fail to keep up repayments.
A guarantor is entitled to raise a complaint about the loan in question if they:
Dealing With Guarantor Loans During COVID
People with guarantor loans can apply for a payment holiday. In addition, anyone with such a loan can request a break from repayments. Measures introduced by the Financial Conduct Authority (FCA) has been designed to help borrowers, particularly affected by the pandemic.
The FCA published guidance for lenders during the first lockdown in the UK. The measures were expected to end on the 31st October 2020 but faced with a second national lockdown were extended further from November.
The new proposals mean those who had not had a payment deferral yet may be eligible to receive two payment deferrals of up to six months. Slightly different guidance was issued for those who have already taken up a payment holiday. In these circumstances, individuals are eligible for a repayment hiatus for three months.
Customers have until the 31st January 2021 to request such a payment holiday. This, in itself, will bring relief to many during the Christmas period. The measures also include that a payment holiday would not count on a borrower’s credit file. However, potential future lenders may be able to consider the information when making lending decisions.
For those with guarantor loans, both borrowers and guarantors, this means that loans will not be considered to be in arrears during this period. As a result, lenders will not pursue guarantors, but they are likely to make them aware of the deferral as guarantors remain potentially liable for the loan in the future.
Guarantor Loan Mis-selling – The Borrower
As we mentioned, the number of complaints upheld by the Financial Ombudsman about guarantor loans is particularly high – higher even than complaints about Personal Protection Insurance (PPI).
You may be entitled to money back if the guarantor loan was mis-sold to you and the lender treated you poorly. The key questions to ask yourself are:
Are you having difficulty repaying your guarantor loan, or can you not comfortably afford to do so? And have you not experienced a significant change in circumstances since you took the loan out?
If so, you might have been mis-sold.
Also, consider the following factors:
If any of the above is true, you and/or your guarantor may have grounds for a complaint, and you could have a case for reclaiming monies from the lender. This remains true for a period of six years from taking out the loan.
Guarantor Loan Mis-selling – The Guarantor
If you are a guarantor on a loan and feel the product was mis-sold, you should consider the following:
What Could I Reclaim On a Guarantor Loan?
In terms of redress for mis-sold guarantor loans, the key principle which will be applied is to restore your position back to where it could have been if you’d been treated fairly at the outset.
The Financial Ombudsman has said that the amount awarded should depend on how it feels the consumer has experienced distress and inconvenience rather than the actual subject of the complaint.
A successful complaint may mean the following steps are taken:
If you are a guarantor, the following outcomes of a complaint are possible:
If you are struggling with a guarantor loan in these uncertain times, it pays to understand your rights and potential claim for redress. There are free-to-use tools available online, ranging from template complaint letters to potential reclaim calculators.