Guarantor loans differ from standards loans because the lenders will demand a second person assures the credit will be repaid.
Although one person may apply and use the credit facility, another must sign an agreement they will be responsible for repaying it if their friend of family member defaults.
Often companies will offer guarantor loans to people with poor credit ratings, CCJ's and on a low income, similar to payday loan companies.
The APR is usually lower on a guarantor loan than a payday loan, however they are still a lot higher than credit from high street banks.
People who are guaranteeing the loans aren't always aware of exactly what they are agreeing to and how it could affect them.
Citizens Advice have previously warned guarantor loans could be more dangerous than a payday loan, CEO of the charity, Gillian Guy said,
"Guarantor loans carry with them huge risks, and our evidence shows people are getting involved without being fully aware of the dangers."
A report by CAB highlighted guarantors as being at greater risk because they weren't viewed as customers and therefore as protected by FCA regulations.
Why Guarantor Loans Can Be Dangerous
Although the interest rate may be lower on a guarantor loan compared to credit from payday lenders, there are other factors people should consider.
- Relationships: Whether it's a friend or family member who is guaranteeing the loan, the relationship could be tested if the borrower fails to repay the credit. When someone fails to meet their contractual monthly agreement, the lender may contact the guarantor to make the payment. If they fail to make the payment they could have a default added to their credit rating.
- Debt Solution: Entering certain debt solutions such as an IVA, Protected Trust Deed or Bankruptcy could be difficult because the lender will likely still demand payment from the guarantor. The borrower and guarantor would both have to enter the debt solutions otherwise a separate arrangement would need to be made from other creditors.
Advice on Guarantor Loans
If you are considering taking a guarantor loan or you're already struggling to repay a loan, please contact Debt Support Trust on 0800 085 0226.
We can offer advice and support on how to deal with the an outstanding loan or the risks involved should you decide to go ahead.