Beware financial peril of guaranteeing somebody else’s debt

Beware financial peril of guaranteeing somebody else’s debt

The Banking Ombudsman is supporting Money Week 2013 by publishing a guide to ensure people considering guaranteeing somebody’s debt understand the potential risks to their own finances.

“Many people we deal with are not as informed about their banking as they need to be. Learning from mistakes is bad enough but learning from mistakes you don’t realise you are making is much worse. We want to help people learn without the pain,” says Banking Ombudsman Deborah Battell.

“The Quick Guide on what people need to think about when deciding to guarantee somebody else’s lending aims to help people be more informed and ask themselves the questions they need to consider before becoming a guarantor.

“Problems people encounter with guarantees when things go wrong consistently feature in our caseload each year, and while the numbers aren’t high, we are concerned that people don’t know enough before they agree to be a guarantor.

“With restrictions on low deposit mortgages taking effect from next month, it is possible more low deposit borrowers will seek guarantors to secure funding for their home loan, and it’s crucial all concerned are fully informed about what that involves in terms of financial risk.

“More often than not, a guarantee arrangement can work well, and is a useful financial tool. But we have found complainants with problems around guarantees are often not fully aware how being a guarantor can expose them financially.

“Unfortunately, ignorance is not a defence and we have seen guarantors find themselves in dire financial straits, which is all the more distressing given their good intentions,” says Ms Battell.

The guide is one of a series of Quick Guides on everyday banking and contains two cautionary tales. All Quick Guides are available on the Banking Ombudsman Scheme website and are used by banks and community organisations to help the public with banking issues. More Quick Guides on topical banking issues are in the pipeline, including one on the restrictions on low deposit mortgages which takes effect next month.

The scheme has also supplied a question for Money Week 2013’s daily online financial literacy quiz.
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