National advice charity Citizens Advice (CitA) has once again highlighted the issue of guarantor loans and the conduct of firms that provide this type of credit.

The charity has revealed that it was contacted by around 560 people during the final quarter of 2016 who were seeking help with issues related to guarantor loans. This represents a 40% increase on the equivalent figure of 400 for the final quarter of 2015.

A common theme amongst people making contact with CitA was that guarantors failed to understand exactly what they were signing up to when they agreed to be a guarantor. Many people seem to believe that they are providing little more than a character reference for the borrower, and not that they could be responsible for repaying the entire loan should the borrower default.

The CitA press release highlights two specific cases:

• An unemployed man who guaranteed a £2,000 loan taken out by his daughter. He was not asked by the lender to sign any paperwork and claims that he did not realise he was liable for the loan should she miss her payments. When called upon to repay the debt as his daughter had missed payments, he was unable to do so
• A woman whose bank requested that she repay a loan taken out by her son’s ex-partner. Again, she failed to appreciate that she was liable for the loan if payments were missed. The woman struggled to make monthly loan repayments of £300 on top of her existing commitments

CitA has repeated its call for the Government to introduce a price cap on guarantor loans and other forms of credit, similar to the one that currently applies to payday lending. It has also recommended that a new requirement is introduced whereby lenders are obliged to send a letter to each guarantor explicitly setting out their obligations as guarantor.

Citizens Advice Chief Executive Gillian Guy, said:

“Friends and relatives are unknowingly trapping themselves with enormous debts.
“Agreeing to guarantee a loan for someone else carries a big risk of being hit with an unexpected debt – but too often people are unaware of the danger they are placing themselves in.

“All potential guarantors should be given a written agreement so they know exactly what they could be expected to repay and when.

“The FCA’s measures to tackle payday loan problems have cleaned up the market significantly – but other forms of high cost credit, such as guarantor loans, still pose a risk.
“Extending the payday loan cap on interest rates and fees across all high cost credit products would protect even more consumers.”

Any firm offering guarantor loans is subject to the Financial Conduct Authority’s rules on responsible lending, and the obligation to ensure that all communications with clients are ‘clear, fair and not misleading’. This means that lenders must make clear to guarantors exactly what their obligations are.

Anyone who believes that a firm has failed to do this can make a complaint to the firm, and can then refer the matter to the Financial Ombudsman Service (FOS). The Ombudsman can make legally binding orders for firms to compensate customers who were not treated fairly.

In the August 2014 issue of Ombudsman News, the FOS said:

“For guarantor loans, we’ll consider what both parties understood about the arrangement – and the consequences of the borrower not meeting their repayments.”

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.