Poor left to carry the can
Acting as a loan guarantor can be problematic unless affordability checks have been carried out, writes Rob Stock.
An irresponsible lender tried to enforce a guarantee that would have left a superannuitant with just $25.25 a week to live on.
It’s led to a warning from financial services complaints expert Susan Taylor, over the risks of going guarantor on a loan.
But it also highlighted that not all lenders are complying with their legal duties under the Responsible Lending Code.
Taylor who heads Financial Services Complaints Limited (FSCL), one of four complaints services to which wronged customers can take their complaints, is seeking publicity after a horror loan guarantee case came before her.
She said the pensioner agreed to guarantee his son’s loan of just $2000, but the son defaulted on his weekly repayments of $180 a week almost immediately, and then ‘‘disappeared’’.
The lender then told the pensioner it intended to take possession of his car, which he had pledged as security. Penalty interest and fees quickly inflated the amount owed to $3500.
Desperate, the pensioner his case to FSCL.
He wasn’t trying to duck the guarantee, offering to pay the frozen principal of $2000, if allowed to pay by instalments. But he told Taylor the lender hadn’t enquired into whether he could afford to take over the loan repayments, or the possible consequences of his going guarantor.
After investigating, Taylor found the lender, which remains unnamed, had got three months of bank statements from the pensioner, but still decided he could afford the repayments, even took though he would only have had $101 per month to cover all his living costs.
The lender claimed it had explained to the pensioner that $180-a-week would be a high amount to repay given his income. It also said hardship laws meant the pensioner could ask for an arrangement to make lower weekly repayments.
Taylor wasn’t impressed, and told the lender it had breached the responsible lending laws in the Credit Contracts and Consumer Finance Act, under which lenders must ensure a borrower, or guarantor, is likely to be able to make repayments without suffering substantial hardship.
‘‘This man could never afford to give this guarantee,’’ said Taylor.
After Taylor’s finding, the lender cancelled the guarantee, leaving the pensioner owing nothing.
Complaints schemes like FSCL and the Banking Ombudsman give consumers a chance to have their grievances heard without the time and expense of going to court, though that also means lenders can avoid the penalties they may face in a court of law.
The schemes also do not name the companies complained about, ensuring their reputations aren’t damaged.
If the schemes discover a systemic issue, they can inform the Commerce Commission, which can investigate.
Guarantees are common in the high-interest, lower tier lending done in many poorer areas, where some people find they can only get loans if a relative goes guarantor for them.
But it has also become more common in mortgage lending as home-owning parents guarantee loans, or portions of loans, so their children can secure a home loan from a bank.
Taylor warned people to be wary of going guarantor, acknowledging it can be hard to turn down a relative.
‘‘The key message is, if you are asked to give a guarantee, think about it and probably say no,’’ she said.
She urged people to read guarantee contracts carefully, and get independent legal advice.
If you are asked to give a guarantee, think about it and probably say no. Susan Taylor, FSCL.