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Explained: The “Guarantor Loan Trap” Myth

Guarantor loans are a common form of lending used in the UK today, but increasingly, questions are being asked about whether they should be subject to more regulation.


Even though the vast majority of guarantor loans are repaid on time with no missed payments, calls are growing for the financial industry to regulate this type of lending more closely. This is despite the fact that the Financial Conduct Authority (FCA) already regulates guarantor loans, meaning this viable type of lending should never be described as a “trap”. But what exactly is a guarantor loan and why have they become controversial?
What is a guarantor loan?


Guarantor loans are a secured type of lending where a second person is required to act as the guarantor, which means they agree to make the repayments if the first person fails to do so. The guarantor is typically a friend, relative or work colleague of the person who needs to borrow money, but they cannot be financially connected in any way, usually ruling out a spouse or partner.



They are far from a new concept, as this was the method used before banks started to embrace computer credit scoring instead. Many landlords and mortgage companies still ask for guarantors.  Indicating the success of this product as it has been implemented into the lives of a great proportion of Brits, over many years.


Guarantor loans are based on trust and they are typically used by people who have a poor credit rating who cannot access other forms of lending. Because of this, comparisons have been made to short term loans, but this is unfair. Unlike short term loans, interest rates with guarantor loans are typically low and there are also no upfront or arrangement fees to pay.


Who are they for?


Individuals who have poor credit often find it hard to access lending when they need it. Guarantor loans are one of the few products available to people in this position, and these products are already strictly regulated by the FCA to ensure that consumers are protected.


Applicants for guarantor loans must be over 18 years old and have a UK bank account, and the lender will require evidence that the money can be repaid on time.


Having a poor credit rating can make it hard to borrow money for purposes such as buying a car, potentially forcing people to pursue less safe lending options. Guarantor loans, when they are used correctly, empower individuals with poor credit ratings to borrow money safely and as long as the payments are made in full and on time, this type of lending can also help these people rebuild their credit ratings and look forward to a brighter future.


Why have they been called a “trap”?


Labour MP Stella Creasy has led the fight against short term loans and she has also put no credit check loans in her sights by describing them as a “trap”. She says: “Given personal debt has doubled in Britain in the last year, challenging the practises in the consumer credit industry which makes these debts unsustainable is crucial to helping Brits who start the year in the red, not the black. With the Money Advice Service warning that nine million of us are in danger of going under with Britain’s personal debt habit we cannot afford to ignore these practices. The FCA’s New Year’s resolutions must be to get to grips with problem debt now holding our country back.”


However, the FCA is already responsible for the regulation of guarantor loans and has made changes to put the financial services sector under tighter control in the last couple of years. There are also signs financial services companies are happy with the changes being forced through by the FCA as a number of new guarantor loans have been brought to the market recently, while they have remained as popular as ever with consumers.


Should there be a cap?


Critics of  guarantor loans often argue that while there is a place in the market for this type of lending, there should be a cap to help protect people from unsustainable levels of debt. But there are already a series of stringent checks in place for those who wish to borrow via a guarantor loan, while those who are willing to put themselves forward to be a guarantor are also checked out before approval is granted for any lending.


Guarantors are almost always homeowners, so is there any need for a cap to be introduced? Most guarantor loan customers are happy with their product and make all the necessary repayments on time to become debt-free. Why punish them with an unnecessary cap on guarantor loans?


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