Guarantor loans are basically personal loans and are regulated by the Consumer Credit Act 1974.
What make them different, is it is not just the person who takes out the loan that can be held responsible for repaying it, but also the person who acts as the Guarantor.
Who are the Guarantors in Guarantor Loans?
When Guarantor Loans are taken out, the loans are provided on the basis that someone, usually a family member or friend, promises to repay them if the borrower cannot or doesn’t. Basically, the Guarantor is held responsible for paying the debt.
Like the original borrower, the Guarantor can have Default Notices served on them and their credit rating can be damaged, just like that of the original borrower. They can also be taken to Court and ultimately have Diligence executed against them using Sheriff Officers.
This can mean:
Ultimately, like the original borrower, the Guarantor can be made Bankrupt, which if they are a homeowner can mean their home is placed at risk.
Why do Lenders insist on Guarantors?
The reason why lenders ask that someone else acts as a Guarantor is usually because the original borrower has a damaged credit rating and they believe there is an increased risk they won’t pay.
Essentially, they are not prepared to lend to the borrower on their own as they consider the borrower too high risk.
What is the risk in acting as Guarantor?
The danger in being a Guarantor is you may be held responsible for the debt that you are guaranteeing.
Also, you may not really know the financial circumstances of the person you are acting as Guarantor for. They may have other debts you are not aware of and they may be experiencing financial difficulties you don’t know about. Also, if they experience a change of circumstances, such as a loss of job or a financial crisis, and cannot pay the Loan, you may find their bad luck becomes yours.
People will promise you when they ask you to be a Guarantor that they will pay the loan, but often when people take out Guarantor Loans, they are desperate, so even though they may have the best intentions of paying the debt, they may not be able to.
It is worthwhile noting that firms that specialise in providing Guarantor Loans are taking more people to court each year in Scotland than any other type of lender.
If the borrower doesn’t pay, or if they go bankrupt or enter a reduced payment plan with a Firm that specialises in Guarantor Loans, then the lenders will pursue you for the full amount.
What must the Guarantor Firm do before they lend money?
Before lending money Guarantor Firms must take certain steps both with the Borrower and the Guarantor.
The first of these is to undertake a Creditworthiness Check. This is done to ensure that the person who borrows the money and the person who acts as the Guarantor can afford to repay the loan.
In carrying out a Creditworthiness Check, or an Affordability Test, as it is also known, a firm must ensure that neither the Borrower nor the Guarantor will suffer any significant detriment when repaying the loan.
To do this Firms are expected to consider the income of the Borrower or Guarantor and what their essential outgoings are, including those outgoings to other debts.
They should also carry out a credit check.
The checks for the Guarantor, do not need to be identical to those for the Borrower, but they still must ensure the loan can be repaid without either Party experiencing significant detriment.
It is not enough for a Creditworthiness Assessment to only be carried out at the time the original borrowing is provided, but should also be carried out every time the lending is significantly increased. This does not mean it must be carried out every time the lending is increased, especially if it is only for a small amount, but when there have been a number of small increases, which added up together, amount to a significant increase, then a further Creditworthiness Assessment should be carried out.
If the Borrower has had multiple loans and possibly missed previous payments this may suggest future loans are not affordable.
How do you challenge Guarantor Loans as not affordable?
Where it is believed that Guarantor Loans are not affordable, they can be challenged.
The first step is to contact the Firm and make a complaint that you do not believe the Firm carried out the correct Affordability/Creditworthiness checks before taking you on as a borrower or as a guarantor.
The second is to request all the information that was used to carry out the Creditworthiness Assessment. This can be done by making a Subject Access Request under the Data Protection Act 2018.
A sample letter that can be used is below. It is important when making a Subject Access Request to just request information about yourself, if you are the Borrower or Guarantor, and not for information about any other Party. They must make their own request.
Lenders should deal with complaints within 8 weeks and provide you with the information you requested under a Subject Access Request within one month.
Once you have your information
Once you have your information, it is important to go through it with a fine tooth comb and check it for accuracy.
Is all the information in your financial statements correct? Do you spend what they say you spend on things, or was that assumptions they made? Do you have the income they say you had at the time you borrowed your money or acted as a Guarantor?
It is important to also check they completed a financial statement for you and that it includes accurate amounts for your rent or mortgage, gas and electricity and household items, like food and clothing.
Often when amounts are included for some of these items, they are still inadequate, or artificially reduced or suppressed to make the loan repayments appear affordable, when they were not.
Also if there are digital recordings of the telephone conversations you had with the Firm, these are worth listening to, especially if they have suggested you should reduce what you are spending on certain items to make a loan appear more affordable than it is; or if there are no recordings, but you have recollections of such conversations, to note these.
You also want to look at the source of your income. Was it entirely benefits, or did it include amounts for earnings? Were these earnings stable, or did they fluctuate from month to month? Did you tell the Firm this? If you did the Firm should have taken an average to establish a sustainable financial statement.
Also did the Firm rely on other people’s income in drafting your financial statement?
Also, if you were in a temporary contract of employment, did you discuss this with the Firm? It may have been they ignored the possible consequences of what would happen if you lost your employment.
Once you have done this, if you feel a proper Affordability test wasn’t carried out or you have other concerns about how your Loan was sold to you, take a note of this in case you are not happy with how they propose to resolve your complaint.
You should also note why you believe this to be the case, highlighting any inaccuracies in the information they held and any gaps or omissions in the evidence.
You should also note the details of any conversations you had with the firm and how they sold you the loan.
Below is a sample complaint letter you can use when drafting your letter to the Firm.
[Name and address of the organisation]
[Your name and full postal address]
[Your contact number]
[Your email address]
Dear Sir or Madam
Complaint – Unaffordability of Loan
[Include your full name, address and account number to help identify you].
I am writing to make a formal complaint in relation to the above loan that I borrowed/guaranteed for you, that was taken out on [date].
I do not believe that a proper Creditworthiness Assessment was carried out for me for this loan, before I was accepted as a Borrower/Guarantor.
You did not, in particular:
[Below are examples of reasons you may complain about. At this stage you many not have all the information you need to go into detail, but where you can, you should outline the reasons why you believe the loan was not affordable. Those issues you don’t believe are relevant should be omitted, but equally other reasons can be used and more information provided]
- Ask me in detail about my income and require me to provide evidence of this;
- Ask me in detail about my expenditure and require me to provide evidence of this;
- Include [adequate] provisions in my financial statement for my [rent/mortgage/council tax/travelling costs/phone costs/food and clothing costs/other debt commitments];
- You carried out a credit check on me and did not have regard to [the fact I have missed payments/Notice of Arrears/ Default Notices for my other debts;
- You failed to consider the [enter number of] Loans I had between [enter dates] and [I missed previous payments on those loans/ and used loans to refinance previous loans.
- You were aware I was already in a [Protected Trust Deed/ Sequestration/Debt Arrangement Scheme/Debt Management Plan];
- You did not have regard to the fact [my income fluctuated month to month/I was self-employed, and my income was irregular/my employment was unreliable/my temporary contract was due to end];
[where a Guarantor
- That I told you I felt pressurised to act as a Guarantor]
As a result of this failure by you to carry out a proper affordability test, I have suffered a detriment and I am now no longer able to afford this loan without struggling and experiencing financial hardship.
I, therefore, request that
[where you are the borrower:
All interest, fees, charges and penalties that have been applied to this loan be refunded to me, with a statutory rate of interest of 8% added from the date of application.]
[where you are the Guarantor:
That all sums I have paid under this loan, including interest, fees, charges and penalties be refunded, with 8 % statutory interest added, and that I have no further liability for any sums remaining under this loan going forward.]
[if you do not want the Guarantor or Borrower to be informed:
I also request that no information about this complaint or the outcome of this complaint be shared with any other party that has any liability under this loan agreement.]
As you will be aware you have 8 weeks to resolve my complaint.
If you are not able to resolve it to my satisfaction within those 8 weeks, I request you provide with detail of how I can take this matter further with the Financial Ombudsman Service.
Subject Access Request
I would also like to make a Subject Access Request under the Data Protection Act 2018.
Please, therefore, supply me with the personal data you hold about me, which I am entitled to receive under data protection law, particularly in relation to:
- All accounts I have had with you and those that remain open, including opening balances, payment histories and increases to my borrowing levels;
- All information that was used in carrying out any Creditworthiness Assessment, as required by Chapter 5.2A of the Financial Conduct Authority’s Consumer Credit Sourcebook.
- Any telephone conversations I have had with your staff which you have stored electronically or digitally;
- Any emails between your staff and any other parties that relate to myself and my accounts;
- Any comments or notes that may have been added to my file by your employees.
- Any financial statements that you hold for me, including previous drafts;
It may be helpful for you to know that data protection law requires you to respond to a request for personal data within one calendar month.
What happens if the Lender rejects my complaint?
If the Lender rejects your complaint, you can take it further to the Financial Ombudsman Service, who has recently been finding, in 83% of all complaints, in favour of those who have complained.
You should use this stage as an opportunity to go into more detail, now you have more information, as to why the loan was not affordable.