Guarantor loans involve a friend or family member supporting your loan application. If you can’t meet your loan repayments, your chosen guarantor becomes liable to repay the debt in your place.
However, guarantor loans can be expensive, and if you think you took one out without understanding what it was, or if your finances weren’t checked properly before it was approved, it may be possible to apply for a guarantor loan refund.
Here we explain everything you need to know including what guarantor loans are, what a mis-sold guarantor loan is and how to apply for a refund.
What is a guarantor on a loan?
When you take out a loan, you are usually responsible for paying this back over a set period of time, and paying for any interest charged on the loan.
However, if you’re not able to get a standard loan, usually because you have a poor credit score or none at all, one option is a guarantor loan.
» MORE: How to check your credit score
These loans work by allowing someone to use a guarantor, usually a friend or family member, who agrees to make loan repayments if the person taking out the loan isn’t able to.
While in theory they are a good option for someone who isn’t able to get a standard loan, guarantor loans tend to be expensive and aimed at those with poor credit scores, or those who haven’t been able to build up a credit history.
» MORE: How to get a guarantor loan
What is a mis-sold guarantor loan?
We’ve all heard about the mis-selling of Payment Protection Insurance (PPI) but there are lots of other areas where mis-selling happens, including with loans.
There are many reasons why a loan might be mis-sold to someone. Usually it’s because the person taking out the loan – and in this case the guarantor as well – was not given the proper information about the loan or not offered help or refinancing if they were unable to pay back a loan.
It can also be the case if a provider hasn’t completed all of the necessary finance checks before approving a loan.
» MORE: What happens if I can’t make my loan repayment?
Why borrowers might be due a refund
If you took out a guarantor loan and believe it was mis-sold to you, you may be due a refund of interest and charges you paid.
This can be the case if you are now struggling to make repayments towards the loan and your circumstances haven’t changed since you took it out. If you’re not able to make other regular payments – such as household bills or housing costs – because of the loan repayments, this means it’s unmanageable.
This indicates that the provider didn’t properly check if you were able to repay the loan before handing over the money, which is required by the Financial Conduct Authority.
Even if you’ve paid off a loan, if you were put in this situation you may still have a case to complain, which can be done at any time but usually needs to be within six years of taking out the loan. An exception to this could be when you didn’t know you had a cause to complain. In this instance you have three years to complain from the point of you becoming aware.
Why a guarantor might be due a refund
If you were a guarantor of one of these loans, or are now, and you aren’t able to make the repayments you may be able to claim a refund. As with borrowers, if your finances haven’t changed significantly since you took out the loan but you are now struggling to make payments, this means a lender probably didn’t check your details properly.
You can also make a complaint if you were pressured into being a guarantor, or if you did it without fully understanding what was required.
» MORE: What to know about becoming a guarantor
How to apply for a guarantor loan refund and file a complaint
If you think you’re due a refund, the first step is to complain directly to the lender who supplied you with the loan, and both the borrower and guarantor are able to do this about the same loan.
You will need to include information such as your personal details, the amount of the loan and date it was approved, and any reference numbers.
You will also need to briefly describe what has happened and why you think you are due a refund and may need to supply bank statements or your credit file to show the impact the loan had on your finances.
You’ll then need to give it eight weeks to respond. If by this time the lender either hasn’t responded or has rejected your complaint, you can then escalate the complaint to the free Financial Ombudsman Service (FOS). It will look into the case and make an assessment based on the evidence it’s given.
There is a list on the FOS website of complaints it’s seen from consumers. These include borrowers being granted loans that they couldn’t be expected to repay and being treated unfairly by the lender, while guarantors have complained about being forced into becoming a guarantor or not being asked at all.
How much will you be refunded if your claim is successful?
If you are successful in making a claim about a guarantor loan, you could be paid back any interest and charges you made, plus 8% interest on the total loan amount. The amount of money will depend on the individual case, and what the FOS rules.
Further compensation could also be paid to you if the experience has caused significant distress or you have been treated unfairly.
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