Loans, tenancies and mortgages are all products that a guarantor can co-sign to enable a customer to get credit.
However, it's important for a guarantor to understand they are committing to paying the debt if a customer doesn't.
There are concerns that many guarantors are unhappy with the process for guarantor loans, with uphold rates for complaints very high.
What is a guarantor?
A guarantor is a person who agrees to help someone access credit products such as loans or mortgages. They can also be used for tenancies if a person has a poor credit score and is deemed high risk.
The purpose of a guarantor is to guarantee (hence the name) that they will make payments if the person named on the credit agreement is unable to.
So, if a parent decides to act as a guarantor on their child's personal loan, they must pay the bills if their child is unable to.
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.
Who can be a guarantor?
As a guarantor is someone who will meet payments if a credit applicant cannot, the guarantor themselves must be a person with a good credit history and financial stability.
Lenders may enforce other rules on guarantors such as:
- Being UK based with a UK bank account
- Being over 21 (rather than 18)
- Being a homeowner
- Having a credit score above a certain number
These restrictions are generally not known until a customer tries to apply for a loan or other product and is told they need a guarantor to be able to access it.
Guarantors generally do not need to be a parent, family member or spouse, but those are the categories of people usually approached to be a guarantor.
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.
However, more letting agents and landlords 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 £10,500 - 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 are guarantors?
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.
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.
It is not unheard of for guarantors to need to remortgage their own home 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 guarantors 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 Citizens Advice made clear in a 2017 briefing note.
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 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 to 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.
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.
Guarantor loan complaints
The Financial Ombudsman Service (FOS) deals with complaints related to guarantor loans.
Full figures for the 2020/21 financial year found that:
- Guarantor loans were the second most complained about loan product, making up over 31% of the total
- There were 22,578 new cases about guarantor loans in 2020/21
- 82% of resolved cases during the year were resolved in favour of the complainant
This last point suggests that people making complaints about guarantor loans have valid grievances far more often than not.
The FOS lists the type of complaints they frequently receive from customers who have taken out a loan backed by a guarantor. They include:
- Affordability checks were not carried out properly
- A customer's circumstances have changed but a lender isn't treating them fairly
- The loan was causing problems with their credit record
- A guarantor was contacted too quickly for payment
They also listed common complaints from guarantors themselves:
- Someone didn't agree to be a guarantor
- Someone felt forced or pressured into being a guarantor
- The liability of being a guarantor wasn't fully explained
- The guarantor should not have been accepted as they couldn't afford to make payments or the loan should not have been given in the first place
- The lender is threatening to take the guarantor to court or repeatedly contacting them for payment
It's the FOS's job to look at whether these complaints are fair and whether the lenders followed the right process when signing customers and guarantors up to the loan agreement.
If the FOS agrees that a guarantor should not have been accepted under the circumstances, they will usually say the guarantor should be released from the guarantee and any payments refunded (with interest).
As the figures above demonstrated, the FOS frequently find in favour of the complainant, so it's worth seeing a complaint through if we genuinely believe the loan was mis-sold or a lender has behaved badly.
Even the most recent quarterly complaints figures for Q3 2021/22 show a 75% upheld rate - so the issues around them are not going away.
Summary: Understand the pitfalls
Guarantor loans and other credit agreements fulfil a crucial purpose for many people. They allow younger people and those with low credit scores to access credit, tenancies and mortgages with the help of family and friends.
Although guarantor agreements often pass off without a problem, some customers will experience problems,
When considering whether to be a guarantor, ask the following:
- Do you believe the person taking out the loan will be able to repay it as planned?
- Is the relationship between you and the credit customer strong enough to withstand any issues around the guarantor credit agreement?
- Do you understand that you will need to pay the debt if they are unable or refuse to?
- Are you in a genuine position to repay the money if requested?
If in doubt on any of these points, it's usually best to avoid agreeing to be a guarantor, however much short-term damage it may cause to a relationship.