Friends and relatives unknowingly signing up to large debts

Friends and relatives are being saddled with mountains of debt after unknowingly signing up to guarantee expensive loan repayments, Citizens Advice has said.

A new report from the national charity warns about guarantor loans – which it says have the potential to be “just as damaging” as payday loans.

This type of loan sees a borrower give the name of a guarantor, normally a friend or family member, who is then pursued in the case of default or arrears.

A Problem Shared says 43 per cent of guarantors who sought help from Citizens Advice were unsure of the extent of their responsibilities. It also highlights that guarantors can still be liable to pay off a debt even if the borrower has died.

The report adds that because guarantors are not regarded as ‘customers’ by regulators, they miss out on basic protections most debtors would receive.

Citizens Advice say the loans, which have average interest rates of 46.3 per cent, are often marketed at borrowers with poor credit histories, sometimes as ‘solution’ loans.

The number of people seeking payday loans is thought to have reduced since regulations were introduced by the Financial Conduct Authority (FCA) last year – Citizens Advice welcomes this but warns that products like guarantor loans could be used more as an alternative.

Like payday loans, Citizens Advice is concerned preventative action by the FCA will not be taken on guarantor loans until it is too late for many people.

The guarantor loan market is now worth £154million and there are more than 50,000 people who took out a guarantor loan in 2013 (the latest year in which good data is available). Figures show the largest lender’s turnover grew by 30 per cent and its profit by 40 per cent between 2013 and 2014.

The loans typically range from £1,000 to £7,500 and contracts can last from 12 to 60 months. This puts them out of the definition of high cost credit, but the charity warns they can be just as dangerous.

Gillian Guy, Chief Executive of Citizens Advice, said:

“Friends and relatives are unknowingly signing up to mountains of debt.

“Guarantor loans carry with them huge risks and our evidence shows people are getting involved without being fully aware of the dangers.

“It is positive that measures have been taken to try and tackle problems with payday loans, but other forms of credit still pose threats.

“The FCA has the chance to act quickly to better regulate guarantor loans – it cannot wait for more people to fall into arrears or be taken to court before taking action.”

The report recommends the FCA take a number of steps, including:

• Requiring lenders to provide guarantors and borrowers with a letter of agreement. This should include a cooling off period in which they can withdraw from the loan.
• Guarantor loan providers should be required to include a liability warning on their promotional material.
• Providers should have to signpost borrowers to free independent debt advice.

Notes to editors

1. The Citizens Advice service comprises a network of local Citizens Advice, all of which are independent charities, the Citizens Advice consumer service and national charity Citizens Advice. Together we help people resolve their money, legal and other problems by providing information and advice and by influencing policymakers. For more see the Citizens Advice website.
2. The advice provided by the Citizens Advice service is free, independent, confidential, and impartial, and available to everyone regardless of race, gender, disability, sexual orientation, religion, age or nationality.
3. To get advice online or find your local bureau in England and Wales, visit citizensadvice.org.uk
4. You can get consumer advice from the Citizens Advice consumer service on 03454 04 05 06 or 03454 04 05 05 for Welsh language speakers.
5. Local Citizens Advice in England and Wales advised 2.5 million clients on 6.2 million problems in 2014/15. For full service statistics see our publication Advice trends.