On 27th September 2016, Hilary Osborn wrote a chilling article in the Guardian about the rise of debts from guarantor loans and rent-to-own firms. Like Hilary demonstrated, many borrowers are unable to pay their loans and lenders are left with no option but to follow the guarantors. The 16% rise in these debts in the second quarter of 2016 is a cause of worry that needs a broader focus involving all stakeholders. In his touching example, Hilary demonstrates the serious financial problems that people often get themselves into prompting the need to look for urgent solutions.
Using appropriate legislations can help keep down the cost of interest
When a client goes for unsecured loans such as guarantor loans or rent-to-own firms, it is important to understand resultant impacts. Many people only read through the conditions half way while others sign without a glance. In other cases, the guarantor jumps into the problem and getting out is almost impossible. A suitable legislation would come in handy.
Like Hilary demonstrates in the article, using legislation helped to lower interest rates on payday loans. After introducing price caps on payday loans that limit interest to 100% on the original borrowed amount, people who are struggling with related debt fell with a whopping 53% according to Citizens Advice.
Legislation limiting the guarantor’s liability to a given level could be of great help to ensure that people do not take full responsibility for money they did not use. The responsibility bestowed on the guarantor should have a way out. For example, though the lender should be allowed to go for the guarantor, it is important to also ensure that the borrower is followed to reclaim the incurred losses.
Emphasizing on risks that guarantors take in guarantor loans
While Hilary’s piece correctly captures the unfolding problem that could be a recipe for disaster, he omits a crucial part of the entire situation; risk taken by the guarantor. If guarantor debts rose by 16%, in the second quarter of 2016, why should you get into the same problem?
Before guaranteeing a loan to your friend, make sure to comprehensively understand the ensuing risks. If you find the risk too much, it is advisable to say no or support your friend with direct cash. Make sure to also read through guarantor loans review to understand the following risks.
- Risk of the entire loan being shifted to the guarantor.
- Danger of being dragged to court.
- Possibility of family breakups after borrowers default.
- Impact on your credit score after default.
- Risk of losing personal
Before you guarantee a loan here are things that should guide you
When a close friend approaches you to be his guarantor, it is prudent to know what you are getting into. It is very important to review why the borrower cannot get a loan directly from the bank. Many people looking for guarantor loans have a very poor credit history. In such a situation, the chances of defaulting are very high and the problems headed your way will be too much to bear. In such a case, do not agree to be the guarantor.
If you have to become a guarantor, insist that the borrower takes a small amount of credit that cannot shock you in the case of default. You can also ask for limited guarantee so that the amount you will be required to pay in case of default is small.