Debt advice charity StepChange has revealed that the number of people contacting it for help with issues related to guarantor loans is 35 times higher than was the case six years ago.
In 2012, when the guarantor loans sector was much smaller than it is now, only 635 people contacted the charity about this type of loan. The figure was around 16,500 in 2017 and 22,281 in 2018, meaning that the number of times a guarantor loan holder sought assistance rose by 35% in just 12 months.
In 2012, less than one in 300 of those contacting StepChange owed money on any guarantor loans, but in 2018 the proportion had increased to around one in 15. Where people had guarantor loans, they represented more than one third (36.3%) of their total debt, up from 19.1% in 2012.
In mitigation, lenders have pointed out that the sector has grown massively in recent years, and that many firms signpost customers in arrears to StepChange, however the figures still represent a massive increase by any measure.
Peter Tutton, StepChange’s head of policy, said that he wanted the Financial Conduct Authority (FCA) “to keep a close eye on where this small but growing part of the market may be creating problems for consumers – whether they are the original borrower or the guarantor.”
The FCA has expressed its concern over the number of loans on which guarantors are being asked to make payments. Guarantors are required to make the payments if the main borrower is unable to pay, or to make up the payment to the required level if the main borrower can only make a part payment. Furthermore, the guarantor is required to take on the entire loan should the main borrower default.
The FCA has said it believes that many people sign up to be guarantors without realising just how likely it is that they will be required to make payments, so it may well be the case that the regulator will announce new rules for guarantor lenders in the near future. FCA supervision boss Christopher Woolard has also been briefing the media, suggesting that guarantor loans will soon be subject to a price cap, similar to that which already exists for payday loans and rent-to-own arrangements.
One organisation that appears to have sensed the way the wind is blowing is Goldman Sachs. The investment banking giant has advised bondholders at one guarantor lender to sell their bonds, citing concerns over the risks in the firm’s loan book and the likelihood of regulatory action against lenders in the coming months and years.
A spokesperson for this lender said:
“StepChange are the people most likely to see our customers as we advise anyone in arrears to seek the valuable holistic advice they provide. Customers more than 30 days in arrears only represent 5% of our net loan book.”
So, the message for the UK’s 15 or so guarantor lenders is clear. Firstly, they need to make sure they carry out rigorous credit and affordability checks on all main borrowers and guarantors. Then they need to make sure guarantors know exactly what they are signing up for. Lastly, for the loans that have already been approved, firms need to make sure they handle any complaints fairly and offer redress where the checks may not have been done properly in the past.
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article