As student antics go, having a farmyard-themed party is hardly killing it. But when I saw pictures on Instagram of my stepson and his friends wearing lumberjack shirts with mountains of hay scattered around the ground floor of their student house, my blood ran cold.
Why? Because I was his rental guarantor. If your child is a student or a young worker, there is a very high chance that their credit history or income will be insufficient to satisfy private landlords, who routinely demand that a parent or family member guarantees to pay the rent — or cover the cost of any damage — if they default.
This has long been a feature of the student rental market, but with an estimated 5.8m “credit invisibles” in Britain, salaried workers with a thin credit file increasingly need to provide a UK-based homeowner who can sign on the dotted line.
“Whether a guarantor is needed is very much dependent on credit referencing,” says David Cox, chief executive of the Association of Residential Letting Agents. He says credit checks commonly use a traffic light system to rank tenants. Red indicates they’ve had credit problems; green means they have a high credit score, but amber means there’s not enough data to make a judgment either way — so they need a guarantor.
If you’re asked to be a guarantor, it could cost more than you think. Although the ban on letting agent fees means that guarantors no longer have to pay to have their credit history and income checked (I’ve paid £75 for this privilege in the past) there are other pitfalls.
If the tenant is sharing a house with friends on a joint tenancy, read the legal agreement you will be asked to sign very carefully — guarantors are usually held jointly and severally liable for any arrears or damage caused by the group.
Mr Cox says it is rare for cases to end up in court, and that sharing a collective responsibility for the property encourages tenants to self-police as they are all equally liable for any debts or damage.
In our son’s case, a hay-blocked hoover was thankfully the worst that happened. Despite this aberration, he managed his money very carefully, and always paid the rent (and bills) on time.
If tenants cannot provide a guarantor, landlords can ask for rent to be paid up front — six months’ worth is not uncommon. A damage deposit (now capped at five weeks’ rent under the new Tenant Fees Act) is also required. For a room costing £150 a week, this could mean putting down the thick end of £5,000 before you have even moved in.
Another alternative is the growing number of companies offering to provide guarantor services to tenants — for a price. A one-off fee equivalent to a month’s rent is the typical going rate, but all this will do is get the tenant through the door. It’s not an insurance product, so the tenant will still be chased for the debt if they default — and for now, these kinds of third-party charges don’t fall under the scope of the letting fee ban.
Another area where guarantors are increasingly being used is personal loans. With payday lenders dropping like flies, the growing number of companies offering to lend money if a friend or family member will guarantee the repayments are a tempting alternative for the cash strapped.
“If you have poor or no credit, we won’t turn you away as long as you can afford the loan,” promises the website of Amigo, the largest guarantor loan provider, which is due to report financial results next week.
It will lend up to £10,000 at an interest rate of 49.9 per cent over one to five years. That is a long time for someone with a chequered credit history to stick to the agreement without incident — but for repayments to be considered “affordable”, they have to be stretched over a long period.
All the while, high levels of interest are being charged (the guarantor’s credit score has no impact on the rate) and if the borrower fails to make the monthly payment, Amigo can simply ask their friendly guarantor to pay up.
Historically, the high return on assets has made subprime lenders very attractive to income-seeking investors including the managers of equity income funds.
Neil Woodford and Invesco’s Mark Barnett both backed Amigo’s £1.3bn flotation last year, and other alternative credit providers including Provident Financial, Non-Standard Finance and Morses Club have all variously featured within their funds. But increasing regulatory scrutiny is making high-cost credit a high-risk investment.
The guarantor loans sector has attracted the ire of the financial regulator, which says the proportion of guarantors making payments is growing, fearing many do not fully understand the risks they are taking.
And the grim reality of the UK’s credit-impaired lending market is that the same customers keep coming back for more.
Amigo’s share price halved in a single day this summer after the lender proactively changed its business model to head off a regulatory crackdown, pledging to halve the share of business that came from repeat borrowers from 38 per cent to about 20 per cent. Next week’s numbers will indicate what impact this has had on its bottom line.
Amigo argues that guarantor lending is a vital part of a functioning credit market, enabling subprime borrowers to consolidate other debts (the reason given on roughly one quarter of its loan applications) or to buy a second-hand car (another 25 per cent).
Whether it is borrowing money or renting a flat, relying on those with stronger credit histories to underwrite lower-scoring relatives and friends is an increasingly prevalent part of our financial lives. Regulators say borrowers are vulnerable. But guarantors are at risk too. Anyone looking to sign on the dotted line to help someone out must understand what they are potentially on the hook for.