The charity organisation Citizens Advice has warned borrowers and regulators that guarantor loans can be just as damaging to people’s finances as payday loans.
A guarantor loan is a loan that is taken out by a customer but backed by another person as security, normally friends or family. This person is then known as the guarantor and has a responsibility to ensure that the loan repayments are made if the borrower does not.
However recent research into the market by Citizens Advice has revealed that many guarantors do not know the full extent of the responsibility that they are taking on. These guarantors can be chased by debt collectors completely legally, even if the person who originally took out the loan has passed away.
The CEO of Citizens Advice, 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.”
The report showed that over 40% of guarantors did not know exactly what they were committed to. It also explained that because guarantors are not viewed as proper customers by the FCA, they were not subject to the same level of protection by regulations.
The Financial Conduct Authority has recently brought in new restrictions on payday loan companies, resulting in less people taking out such loans. One of these new regulations was an interest rate cap that was introduced to stop the astronomical levels being charged by many companies.
Citizens Advice are now claiming that guarantor loans can be “just as damaging” as these payday loans.
It wants the FCA to make sure that:
– Guarantors are given a letter of agreement, and a cooling off period
– Loan providers put a liability warning on marketing material
– Lenders have to direct borrowers to free independent debt advice.
The FCA said it agreed that guarantors should be treated like customers.
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