Can a Guarantor get their money back?
Are Guarantor Loans a good idea?
If someone has asked you to be a loan guarantor, you might feel you want to help but are nervous about taking on this responsibility. You want to do a good thing, but not at the expense of your financial security. If you’re considering saying yes, you must understand precisely what a Guarantor Loan is and, more importantly, what happens if the borrower fails to pay.
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What is a Guarantor Loan?
In a nutshell, a Guarantor Loan is a type of loan that you take out with someone. You will only make payments towards the loan if the primary borrower cannot pay. Unless you are extremely well-backed financially, this is very risky.
Let’s look at the risk involved and what you could do instead.
How does a Guarantor Loan work?
With a Guarantor Loan, the primary borrower signs a Consumer Credit Agreement directly with the lender, whereas the guarantor is part of the agreement but not the primary borrower.
As a result, the guarantor may not be protected by essential aspects of Section 7.3 of the FCA Handbook. This is key because any methods described in the Token Payment Method when dealing with your debts may not be valid. The lender is essentially free to pursue more proactive collection practices.
If the primary borrower fails to make the contractual payments, the debt becomes the guarantor's responsibility.
What happens to the guarantor if the loan is not paid?
If the guarantor has been called upon to take over the loan payments and does not make the agreed monthly payments towards the debt, the loan may default. This may lead to legal recovery action, not excluding a County Court Judgment.
Lenders that provide borrowing based on a Guarantor Loan are quite strategic with who they choose to be the guarantor. They will usually suggest a person who:
- Has an emotional attachment to the borrower (like a family member, spouse, relative or close friend)
- Has assets (like a property)
The emotional attachment serves to reduce the risk of the borrower defaulting on the payment. At the same time, the guarantor's assets provide the lender with a means to secure the debt should the guarantor also default. Essentially, these are two tactics with a single purpose: to ensure the borrower's payment and manage the lender's risk...
Don't forget to read The Real Debt Guy's final thoughts below!
