The Financial Conduct Authority (FCA) has revealed that there has been a significant increase in the number of consumers taking out guarantor loans.

According to the executive director of supervision, retail and authorisation at the FCA, the balances on guarantor loans across the country has more than doubled compared to what it was three years ago.

It is estimated that in 2019, current balances on guarantor loans are nearing a staggering £1 billion in total, according to reports from Guarantor Loan Comparison.

What are guarantor loans?

A guarantor loan is different from a standard loan which involves both the borrower and lender, but instead the borrower invites someone they know to be a ‘guarantor’ who will ‘guarantee’ to cover the repayment of the loan if the customer is unable to repay to.

The fundamental notion behind a guarantor loan is that the lender has greater security when providing finance, as they can rest assured that it is possible for them to take repayment from another, nominated person.

Who applies for guarantor loans?

 Generally speaking, the type of consumer who typically applies for a guarantor loan is someone who has a poor credit history, or has taken out very little credit to date, which can be a hindrance when applying for finance. The product is very popular amongst young people in their 20s and they commonly use their parents to be a guarantor – which allows the parent to help financially, without having to commit to any physical money.

Who can be guarantor?

A guarantor loan enables the main borrower to nominate someone with a reliable credit history, which may make a lender more willing to provide a loan.

In terms of who typically fits the guarantor criteria, they are usually a friend, colleague, spouse or family member. The best types of guarantors are usually homeowners or car owners who have shown they have a good credit repayment history.

They will also need to be over the age of 18, and must be a UK based resident.

Concerns raised over guarantors

Alongside the FCA publishing statistics showing the increase of guarantor loans across the UK, the regulatory body has also raised concerns over those acting as guarantors.

The FCA has said that there is ‘growing anecdotal evidence’ that a number of nominated guarantors seem to not be fully comprehend the likelihood of having to make the repayment themselves.

Proportion of guarantors making payments rises

The FCA has said that recent data suggests that the number of guarantors making guarantor loan payments on behalf of the main borrower has increased, making at least one payment.

FCA to implement changes to guarantor loan sector

As a result of worries about the guarantor loan sector, the FCA has stated it will be implementing some changes to the industry.

Its work will focus on affordability checks, as well as ensuring that acting guarantors have been given sufficient information prior to signing to a loan agreement in order to understand the likelihood as well as the implications of the guarantee being implemented

There have also been some amendments to rules so that they extend to guarantors too. These include, pre-contractual explanations and rules requiring forbearance.