Guarantor loans are likely to see real problems in the not too distant future as a result of the Coronavirus. With the Coronavirus pandemic gripping the world’s economy this is likely to have a considerable impact on everyone’s finances both in the short term but especially as we move out of lockdown. Individuals at present, whilst there are of course some exceptions, have largely been cushioned by the financial consequences of the Coronavirus.
Businesses have been greatly affected but many individuals who were employed have been cushioned by this with the various furloughing schemes that are protecting the economy from the lockdown. However, there will be a time when this safety net is removed which is when the real financial hardship and difficulties will surface.
What are Guarantor Loans?
Guarantor loans are loans taken by individuals which are guaranteed by close friends or family members. They can be an extremely useful vehicle for those who are unable to obtain finance to do so, where the lender is protected by the guarantee that they can call on which is been provided by third-party.
Sadly there seems to be little focus on the guarantor and their protection in relation to any of these particular loans. The lender themselves not only is receiving higher interest rate because they are inherently riskier loans because they are being lent to individuals who otherwise would not have received finance without the guarantee. Therefore the interest rate tends to be weighted in order to reflect this and can be high.
The borrower was responsible for repaying back the debt is relieved to receive not only the borrowing in the first place so that they can pay other bills or purchase something they would not expect to be able to do due to either poor credit history or low income. However, as a borrower again they are protected because if there is a default the lender will automatically go after the guarantor.
Why is there a risk now with Coronavirus?
With the enormous impact that the Coronavirus will have on our economy there is likely to be considerable repercussions on everyone’s finances as the cushioning protection from the various economic stimulus is withdrawn. This is when we will see an impact on people being able to service loans and in turn guarantors for these forms of loans will be called upon to pay the debt.
Due to the nature of guarantor loans individuals who have taken them are likely to be on a lower income or be at most risk as a result of the financial impact of the Coronavirus. In turn is likely therefore that they will suffer most when the lockdown is lifted.
The guarantors will then have to step in and be held accountable for those loan facilities that they have guaranteed, albeit in a time before the Coronavirus raised its ugly head. In turn guarantors themselves may well have suffered financially as a result of the Coronavirus and their financial positions could well have changed. This could lead to greater hardship financially and an inability for them to meet commitments such as a guarantee that they provided in the past.
What should I do if I am Guaranteeing a loan?
If you guarantee a loan for a family member or friend it is important to establish a number of facts. Firstly you must contact the friend or family member and have a serious discussion about their finances and whether they are able to meet the obligations of the loan which you are guaranteeing.
It is important regardless of that conversation that this is closely monitored, particularly if they are being furloughed, and whether they will have a job to go back to on an ongoing basis.
You can then decide between you how best to deal with the loan balance and monthly commitments. There are opportunities to defer payments, but is important to realise that any of the deferral options which are being offered across the board are only just that. They are deferring your requirement to pay they are not reducing the amount that you will ultimately pay. Indeed, interest will be added and if payments aren’t made the longevity of the facility is likely to increase as interest compounds.
There may be call on these lenders to address this but there is a very real possibility the borrowing levels will increase over time should you wish to defer.
There may be an opportunity to contact the lender if you believe difficulties will arise to make an offer of payment is full and final settlement. Again this could be problematic and could affect your credit rating both lender and the provider of the guarantee.
What can I do if I am Guaranteeing a loan for a friend or Family Member?
If you are guaranteeing a loan for a friend or family member it is important to establish your liability as there is a very real possibility that guarantee loans that have been provided will be called upon at some point in the near future.
If you have concerns about the guarantee another option is to formalise a complaint to the firm and in turn if they decline the claim take this forward to the Financial Ombudsman for review.
The complaints process for dealing with any financial complaint is that within a period of eight weeks from receipt of the complaint the firm has to acknowledge its receipt. Within the eight weeks the firm will then investigate and respond to you in full. They may on occasions request more time but within that eight weeks they must provide you with your rights to take the complaint further to the Financial Ombudsman service.
The Financial Ombudsman service will then have to be approached within a period of six months from the date of the final response from the firm. If you do not take this complaint to the ombudsman within that period of time you would have lost your ability to do so in the future.
You probably have concerns about the responsibility of the lending provided by the lender which you are guaranteeing and it is probably worth establishing your rights under the terms of agreement now that the Coronavirus has taken hold and we are in lockdown.
Irresponsible lending and the protection of borrowers where in the case of loans of this nature the guarantor is essential. Many forms of borrowing have in recent years become lax and the correct information has not been established to assess whether an individual is able to meet financial commitments in a safe and sound way. Firms have relied on other factors such as guarantors to protect them from shoddy lending decisions. It is therefore essential as a guarantor that you make sure you are protected to the fullest and if a complaint is necessary against the firm in order to establish this then so be it.
Are Guarantor loans Responsible Lending?
Are all guarantor loans responsible lending? Perhaps the question should read are guarantor loans irresponsible lending?!
By the very nature of a guarantor loan there is a tremendous element of risk. Normally risk is borne by the lender where through their years of information and lending skills have built huge back catalogue to establish who can borrow, who will repay, etc etc. They can then program lending software so that they only lend to those individuals who have either a proven track record, want to borrow for a certain type of product or service where they now that there is a history of good repayment.
The problem with guarantor loans is that the lender becomes lazy. Perhaps that is unfair, in that the lender does not need to become lazy they just don’t need to worry about it so much. The onus for their lending criteria has changed from one of establishing if an individual who was borrowing money is of sound financial status to one where they can rely on a guarantor and establish if they are able to repay debt.
The loan company are therefore protected on two fronts with the onus in some respects to establish if the individual borrowing the money having to be established by the guarantor and not the lender. The guarantor being completely new to the money lending circle that they are now entering into. The guarantor taking all the risk but receiving any reward whatsoever because they do not receive any interest or any other form of protection both from the borrower or the provider of the finance.
As a guarantor you will be in an extremely vulnerable and lonely place. There is a good chance, as you are relying on third-party to lend correctly that they have not done so or done so in a way that would have protected yourself from the financial consequences of the borrower defaulting. The borrower must be a close friend or family member who you clearly want to help out but by the very nature of requiring a loan of this type a poor credit risk.
Guarantor loans have always been poor in the assessment of responsible lending, this will only get worse if you are a guarantor as a result of the troubling times we are seeing through the Coronavirus and the financial aftermath that it will bring.