What is a Guarantor Loan?
A guarantor loan is borrowing money on the understanding that if you do not pay, someone else (the guarantor), becomes responsible for repayments.
The guarantor signs an agreement to confirm they understand they could become liable for the entire outstanding amount.
If you start missing payments the creditor, (the company lending the money), will contact your guarantor to instruct them they must begin paying on your behalf.
Usually, guarantor loans are joint credit agreements by another name. Both parties (borrower and guarantor) are equally liable for 100% of the debt. If one party won’t pay or becomes insolvent, then the loan provider can go after the other party for payment in full.
Often, the borrower’s mum or dad is the guarantor.
The FCA has concerns about these types of loan due to the pressure which can be put on the guarantor to get the loan, then on the borroweer should there be payment difficulties.
Guarantor loan interest rates
Guarantor loans aren’t heavily regulated, even less so than payday loans. Both types have extremely high-interest rates, but the interest cost could be higher over a longer-term with a guarantor loan.
The regulation of payday loans guarantees the amount to be paid back, including interest and any extra charges can not be more than double the original amount borrowed. Guarantor loans don’t have the same regulations.
The trouble with guarantor loans
Borrowers often pressure the guarantors into agreeing to the loan. Then, once the loan is taken out, it is the borrower who is under emotional pressure to maintain payments to stop their guarantor being called on.
Default rates for such loans are misleadingly low. Payments are made at the expense of other financial commitments, or extreme measures are taken to pay the loan off.
Guarantor Loans and IVAs
Important: All we can write about here is what currently ‘tends’ to happen and is ‘typical’ of the guarantor loan providers we deal with most often. They each have different contracts with borrowers and guarantors, and each has its own policies in regards to the IVA proposals when the IVA is running. These policies are not in the public domain and can change without notice. You may have a different experience than described below should you enter, or attempt to enter, an IVA with such a loan.
If you are the borrower
Like all the unsecured loans in your name, it should be included in the IVA. You will get the same protection from the creditor as you would for your other debts, in that is they must stop contacting you for payment. This creditor receives the same dividend from the IVA as the other creditors.
However, the guarantor loan providers ‘tend’ to vote against IVAs. So if more than 25% of debt is with one; the IVA usually (not always) gets blocked. We would advise that, with the guarantor loan included, an IVA is not possible.
If the IVA is approved then what ‘tends’ to happen is that the guarantor is chased for the full remaining balance, despite also getting payment from the IVA.
Therefore you should attempt to remove yourself from the guarantor loan before trying to get an IVA.
The best way to do this is to reach an understanding with the guarantor, so they make the loan repayments. You are free to arrange to pay them back once the IVA completes.
You are the guarantor
We are required to ask everyone approaching us for an IVA if they are a loan guarantor. This information is not viewable from bank statements nor credit reports if they, the guarantor, has not been called up to make payments.
Like in the case of the borrower, guarantor loans provider ‘tend’ to vote against IVAs. So again, if their share of the total debts exceeds 25%, in all likelihood, an IVA would not be possible.
Typically guarantor loan agreements are similar to joint credit agreements; where both parties (in this case the borrower and guarantor ) are equally liable for 100% of the total debt.
So, if say the guarantor loan provider is 20% of the total debt, they get 20p in the pound of the dividend. Therefore the other party (the borrower) remains liable for the other 80%.
Both borrower and guarantor enter IVAs at the same time
There can be a partner/spouse combination for the borrower/guarantor. If you both decide to enter IVAs at the same time on account of these and other debts, they are called interlocking IVAs.
Interlocking IVAs are administered together, and you make one joint payment between you. With interlocking IVAs, any joint debts (such as guarantor loans) are included in both IVAs. The joint debts get payment from the interlocking IVAs and once they’ve ended anything still owing is written off.
Getting yourself removed from a guarantor loan
The regulator (FCA) wrote to the loan companies in March 2019 expressing concerns. They are looking at the affordability of such loans and whether potential guarantors have enough information to understand how likely it is that they may have to take on the payments.
If being a guarantor to a loan is a significant cause of you considering an IVA, look into removing yourself from the loan; on grounds of the absence of proper affordability checks for both you and the borrower.
You can complain to the loan provider, and if unsatisfied with their final response, you can take your complaint to the Financial Ombudsman Service. See what FOS says about guarantor loan complaints. Creditor loath complaints being made to FOS. There is the admin cost on their side in having to defend the complaint, plus FOS charges the creditor a fee for managing every complaint irrespective of the outcome.