What does being a guarantor involve?
"My daughter is setting out on her own but she needs a bit of help getting a place to rent and covering early household costs. Should I agree to be her guarantor?"
We all want to be able to help our friends and family if we can, and many of us will have had someone act as a guarantor for us when we first rented a home, or possibly when we applied for credit somewhere.
But with the rapid rise of guarantor loans, it's become clear that many people don't actually know the kind of commitment they're making when they agree to take on this role - something we hope to set right in this guide.
What is a guarantor?
The decision to become a guarantor shouldn't be taken lightly, as in doing so we're providing a form of insurance to the product provider regarding payment or other contractual obligations.
Anyone signing up to be a guarantor is therefore potentially liable for someone else's debt - whether in the form loan repayments or other contractual obligations.
What exactly we're agreeing to will be set out in the document we're asked to sign, which we must do with a witness present.
Guarantors will often be asked to provide evidence that if called upon, they can afford to meet those obligations.
What kind of products need guarantors?
Traditionally, guarantors were only needed by those entering into certain types of tenancy agreement - but there's been a rise in companies using guarantors as a basis for customers to obtain loans and mortgages.
When it comes to tenancy agreements, it used to be that guarantors were only needed for students, first-time renters, and the unemployed.
But according to PIMS, an organisation specialising in landlord legislation and management, "the harsh reality is the current economic climate means every tenant is a risk".
The result is that more letting agents and landlords than ever are requesting that tenants are backed by a guarantor.
There's also been a rise in mortgages that require a guarantor. These are far more serious, as the obligation can last as long as the mortgage itself, and with much greater consequences.
Another relatively new product is the guarantor loan. Because they require someone else to promise to pay the bill should the borrower default, the loans are often much larger than those usually offered to people with poor credit histories.
The sums involved - from £1,000 to £7,500 - combined with average interest rates of more than 46% mean that guarantors can quickly become liable for many thousands of pounds if the borrower fails to keep up repayments.
How liable am I?
Guarantors are legally bound to pay off the remainder of the loan, mortgage or rent if the borrower fails to pay it themselves.
In rental property, the guarantors are also liable for any damage, cleaning costs, outstanding bills or any other tenancy related obligation - in effect they are agreeing to the obligations outlined in the tenancy agreement.
Furthermore, a guarantor for someone with a shared tenancy is providing a guarantee that all of the tenants will honour the tenancy agreement.
According to Giles Peaker, a partner at Anthony Gold Solicitors:
"If students are on a joint tenancy the guarantors will be joint too, meaning that one poor parent could end up being chased for the rent arrears caused by someone else's vanishing child."
In the case of some guarantor loans, and particularly with guarantor mortgages, the stakes can be much higher.
Because the loans themselves are bigger, the commitment is greater - and with loans, the interest accrued can cause the amount repayable to snowball rapidly.
Citizens Advice have heard from people who've had to remortgage their own homes to meet their obligations as guarantors - or risk having their own home repossessed in order to cover the costs.
In the case of some guarantor mortgages, however, it is sometimes possible to limit liability.
Say we're agreeing to back our child on their first mortgage, and they can only afford so much on their own, but with a guarantor they can get 50% more - and it may also be possible to limit our exposure to cover just the extra amount.
What rights do I have?
Guarantor loans are a relatively new product, and there are concerns that guarantors aren't having it made clear to them exactly what they're responsible for - something that, at the time of writing, the Financial Conduct Authority are investigating.
Even so, guarantors cannot be held liable for any obligations they aren't fully aware of, or for terms in an agreement which are deemed to be unfair - which Citizens Advice say may be the case if they create a "significant imbalance" between the parties involved.
At the very least, guarantors have the right to read the agreements they're being asked to sign, and be given sufficient time to ask questions before doing so.
With tenancy agreements, subsequent variations in the agreement discharge the guarantor's liability unless they are made with the guarantor's consent.
This is important, as it means that a guarantor's liability isn't automatically extended when an assured short-hold tenancy switches to a rolling monthly contract - but the original agreement may state that liability applies to future variations or renewals until the end of the tenancy.
This type of open-ended contract is best avoided or, at least, renegotiated so that the term of liability is fixed.
Should they be called upon, guarantors have the right to be informed immediately what they are being held liable for.
The bad news for mortgage guarantors is that they often have few or no rights other than those stipulated in the initial agreement, for the duration of the contract.
It's crucial, therefore, to think carefully before agreeing, and to seek advice on any agreement before signing it.
How can I be removed as guarantor?
Getting released early from a guarantor contract often isn't possible.
Some guarantor agreements contain a termination provision that allows the guarantor to withdraw after a certain period during the fixed term - in a guarantor mortgage they may be released when the borrower has enough equity in their property, for example.
If no termination provision exists, guarantors remain liable until the end of the contract, unless the other parties consent for them to be released.
That means a guarantor could well be locked in until the borrower moves their mortgage or sells up, and if they don't - well.
To prevent getting in to this situation, it's essential to understand the terms of the contract before signing it. Seek independent advice for even the smallest of queries.