Debt
Guarantor loans and lending to family
Guaranteeing a loan makes you liable for the whole debt, and family lending destroys more relationships than it saves.
Helping someone financially is a normal and decent thing to do, and the two most common mechanisms both carry consequences that people do not anticipate.
What being a guarantor means
More than most guarantors understand.
A guarantor is liable for the debt if the borrower does not pay — in most arrangements for the full outstanding amount including interest and charges, not merely the missed payments.
The lender can pursue the guarantor directly, and in many arrangements does so without exhausting options against the borrower first.
Missed payments appear on the guarantor's credit file.
The commitment affects the guarantor's own borrowing capacity, since it is an existing liability.
And the guarantor generally cannot withdraw once the agreement is made.
Before agreeing to guarantee anything
The questions.
Could you pay the entire amount if required, without hardship?
If the answer is no, you should not guarantee it, since that is precisely the scenario the arrangement exists for.
Do you understand exactly what you are liable for and for how long?
What happens if the borrower's circumstances change?
Is the borrower being lent to responsibly, or is the guarantee the only reason the lender is willing?
And would the relationship survive you being pursued for the debt?
Guarantor loan products
Which have specific issues.
These are high-cost products marketed at borrowers who cannot obtain mainstream credit, with the guarantee substituting for the borrower's creditworthiness.
Regulators in several markets have taken action over affordability assessment of both borrower and guarantor, and several providers have exited or collapsed.
Redress has been available where guarantors were not properly assessed or informed.
Which means anyone who has been pursued as a guarantor should check whether the arrangement was properly made, since complaints have succeeded at scale.
Rent guarantees
A common and under-examined commitment.
Guaranteeing a tenancy typically makes you liable for rent and frequently for damage and other costs.
In joint tenancies, the liability may extend to the whole rent rather than one share, meaning you can be liable for other tenants' failures.
The commitment may extend beyond the fixed term into any periodic continuation, sometimes indefinitely.
Which makes reading the guarantee document rather than the tenancy the essential step, and negotiating limits — to one share, to a defined period — is possible and rarely attempted.
Lending to family
Where the problems are different.
Family lending is common, is rarely documented, and is a frequent source of lasting family conflict.
The predictable failures: different understandings of whether it was a loan or a gift; no agreed repayment schedule; no record of what has been repaid; resentment accumulating on both sides; and the borrower avoiding the lender socially.
Which produces the outcome that the money is lost and so is the relationship, which is worse than either alone.
Doing it properly
If you lend.
Decide first whether you can afford to lose it entirely, and if not, do not lend.
Be explicit about whether it is a loan or a gift, and say so plainly.
If it is a loan, write it down: amount, repayment schedule, whether interest applies, and what happens if payments are missed.
Keep a record of repayments.
Agree how it will be discussed, so that asking about it is expected rather than awkward.
And consider whether a gift of a smaller amount would serve better than a loan of a larger one.
The alternatives to lending
Frequently better.
Helping the person get free debt advice, which addresses the underlying position rather than one payment.
Helping them check benefit entitlements, since unclaimed support is frequently the gap.
Paying a specific bill directly rather than transferring money.
Providing practical help — childcare, food, accommodation — which does not create a debt.
Helping them access a credit union, which lends at capped rates.
And, for larger sums such as house deposits, a properly documented gift or a declaration of trust recording an interest in the property.
Family money and inheritance
Where informal arrangements cause disputes.
Loans to one child and gifts to another produce lasting resentment unless documented and addressed in a will.
Unrepaid family loans form part of an estate and can complicate administration.
Contributions to a property owned by someone else create potential claims that should be documented at the time.
And in several jurisdictions, gifts made within a period before death have inheritance tax implications.
All of which argue for writing things down, which costs nothing and prevents a great deal.
Saying no
Which is legitimate.
Declining to lend or guarantee is not a failure of family obligation, particularly where doing so would put your own position at risk.
What helps: declining clearly rather than vaguely; offering a different form of help; and being honest about the reason, which is generally that you cannot afford the risk rather than that you doubt them.
And noting that a guarantee you cannot honour helps nobody, since the lender will pursue you and the borrower will still be in difficulty.
General information only, not financial or legal advice. Take independent advice before guaranteeing any borrowing, and contact a free debt advice service.
