Guarantor Loans UK: What Happens When the Guarantor Cannot Pay

A guarantor loan is a loan where a second person promises to pay if you cannot. If the payments stop, the lender does not just move on to the guarantor overnight.

There are rules. The lender has to warn you, warn the guarantor, and follow steps set out by the Financial Conduct Authority (FCA) and the Consumer Credit Act 1974. If they skip those steps, or if the loan should never have been given in the first place, the guarantor can often be released from the guarantee.

This guide explains, in plain English, what happens when a guarantor loan borrower cannot pay, what the lender must do, and what the guarantor's rights are.

This is general information, not personal financial advice or regulated debt advice.

Prefer to watch instead? This video covers the main points from this guide, including what the lender must do before chasing the guarantor, the section 87 default notice, the guarantor's rights under FCA rules, and what to do if you are the guarantor and cannot pay.

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What the lender must do before they chase the guarantor

The lender cannot just pull money from the guarantor the day a payment is missed. They have to follow a proper process.

Under section 87 of the Consumer Credit Act 1974, if the lender wants to enforce the loan (for example, ask for the full balance early or take security), they must first send a formal warning letter called a default notice. You can read the section in full on legislation.gov.uk.

Section 111 then requires the lender to send a copy of that default notice to any guarantor. The FCA restates this in FG17/1, paragraph 2.4, in almost the same words:

Section 111 requires a copy of the default notice to be served on any guarantor.

FCA Finalised Guidance FG17/1, paragraph 2.4

In plain English: the lender cannot move to chase the guarantor unless they have also sent the guarantor a copy of that formal warning letter. No copy to the guarantor, no enforcement.

Section 88 of the Act then says the guarantor must be given at least 14 days from the date they receive the default notice to fix things (for example, catch up on missed payments) before the lender can move to enforcement. The full text is on legislation.gov.uk.

The FCA is also clear about what counts as "enforcement" in this context. FG17/1, paragraph 2.7, says enforcement includes:

• demanding payment from the guarantor; or
• taking payment from the guarantor's bank account (for example by direct debit or by a continuous payment authority on a debit card) without giving them appropriate advance notice.

In other words, the lender does not have a free hand to sweep the guarantor's account the moment a payment fails.

The three routes a lender should follow

This is the single most important paragraph in FCA guidance on guarantor loans. FG17/1, paragraph 2.16, sets out what the lender should do before taking a payment from the guarantor:

In effect, therefore, in our opinion a lender has three options: obtain the guarantor's express consent to make the payment on each occasion, pre-notify the guarantor and wait a reasonable period (at least five working days) before making the payment, or issue a default notice in accordance with the CCA and wait 14 days before making the payment.

FCA Finalised Guidance FG17/1, paragraph 2.16

In plain English, before any of the guarantor's money moves, the lender must do one of these three things:

• Ask each time. Get the guarantor's clear agreement before every single payment they take.
• Warn and wait. Tell the guarantor a payment is coming, give them the details, and wait at least five working days.
• Send a default notice. Issue the formal Consumer Credit Act warning and wait a full 14 days.

If a lender skips all three routes and just takes the money, the guarantor has strong grounds to complain and to ask for the payment back.

What the default notice must tell the guarantor

The default notice is not just a formality. It has to contain specific information so that the guarantor knows exactly what is happening and what they can do about it.

FG17/1, paragraph 2.5, sets out what the notice must include, drawing from section 88 of the Consumer Credit Act:

• the nature of the alleged breach (what has gone wrong on the loan);
• if the breach can be fixed, what needs to be done and by when (at least 14 days from receipt of the notice);
• if the breach cannot be fixed, the sum required and the date by when it must be paid;
• a statement of the consequences if the breach is not fixed by the deadline.

FG17/1 also sets out, in paragraph 2.13, four specific things the lender must tell the guarantor before it takes any payment from them:

• the nature of the borrower's breach;
• the amount overdue;
• when the lender intends to take the payment; and
• that the guarantor has a right to cancel any authority they gave (for example, cancel a continuous payment authority with their bank).

If a default notice or a pre-payment warning is missing any of this, the guarantor can point that out in a complaint.

Continuous payment authority: the two-attempt limit

A continuous payment authority (CPA) is a permission a lender takes over your debit card. It lets them try to take money from your card whenever they choose.

Guarantor lenders often set one up on the guarantor's card as a backup. If the borrower misses a payment, the lender can try to collect from the guarantor's card directly.

FCA rules limit this. The Consumer Credit Sourcebook (CONC 7.6) says a lender must not attempt to take payment through a continuous payment authority more than twice in relation to any one agreement, unless the customer has agreed something different. After two failed attempts, the lender has to contact the customer.

Any guarantor can cancel a continuous payment authority. You do it directly with your bank, not with the lender. The bank cannot refuse to cancel it. It is your bank's duty to stop the payments once you ask, under the Payment Services Regulations.

Cancelling the authority does not cancel the debt. It just means the lender has to stop trying to take money automatically, and has to talk to you about a payment arrangement instead.

The guarantor's rights: what FCA rules actually say

One of the most important things to know is that the guarantor is treated as a customer in their own right. They are not just an add-on to the borrower.

The FCA is explicit about this in CONC 7.1.4R, which says the rules on arrears, default and recoveries apply to a guarantor as if the guarantor were the customer.

In practice, this means:

• The guarantor has the same right to be treated with forbearance and due consideration as the borrower.
• The lender should not pressure the guarantor into paying more than they can afford in one go.
• The guarantor can offer reduced payments if paying in full would leave them short for essential bills.
• The guarantor can complain about how they are being treated, both to the lender and to the Financial Ombudsman.

The FCA also required guarantor lenders to check whether the guarantor could actually afford the payments in the first place. CONC 5.2A sets this out. If the lender skipped that check, the guarantor may have a valid unaffordability complaint even before things went wrong.

Before signing, the lender should have given the guarantor a proper pre-contract explanation of the risks. That is a separate FCA rule at CONC 4.2. If that explanation was rushed, generic or not given at all, that is another ground for a complaint.

What to do if you are the guarantor and cannot pay

If a lender has contacted you saying the borrower has stopped paying and they now want you to pay, do not panic and do not agree to anything on the phone.

Here is a sensible order to work through:

1. Ask what stage they are at. Has a default notice been sent to the borrower? Has one been sent to you? What date? Get it in writing.
2. Ask for a copy of the loan agreement and the guarantee. You are entitled to see what you signed.
3. Cancel any continuous payment authority on your debit card if you cannot afford payments. Do this with your bank, not the lender.
4. Do a budget. Work out what you can genuinely afford after essential bills. Use a proper budget tool, not a number you guess on the spot.
5. Make a written offer of what you can afford, if anything. Do not offer more than you can pay.
6. Keep everything in writing. Letters, emails, dates and times of calls, names of people you speak to.

If the offer you can afford is small or nothing at all, that is not the end of the road. FCA rules on forbearance say lenders should consider accepting no payments, reduced payments or token payments for a reasonable period where paying more would leave you unable to meet priority debts or essential living costs.

If you are the borrower and cannot pay

If you are the person who took out the loan, and you know you cannot keep up the payments, the sooner you tell the lender, the better.

Do it before the lender starts approaching your guarantor. Speaking to the lender does not commit you to anything, and it gives you a chance to explain the situation before the process moves on to your guarantor.

When you contact them:

• Tell them your circumstances have changed.
• Ask them what forbearance options they can offer, including reduced payments, a payment holiday or a longer term.
• Ask them not to contact the guarantor until you have had a chance to discuss it.
• Put the offer you can afford in writing after you have done a budget.

You cannot stop the lender contacting the guarantor forever, but you can slow things down while you work out an arrangement, and you can protect the relationship by warning your guarantor before the letters land.

If your budget shows that even a reduced payment is not affordable, the lender should still treat you with forbearance under CONC 7.3. That means considering token payments, breathing space or a longer repayment period rather than moving straight to enforcement.

Complaining and getting released from the guarantee

Guarantors have real rights of complaint, and the Financial Ombudsman uses them.

The Ombudsman's own guidance for people who took on a guarantor loan is clear:

If we think that the guarantor loan provider unfairly accepted you as a guarantor, then we'll usually say that you should be released from the guarantee.

Financial Ombudsman Service, guidance on guarantor loans

In plain English: if the lender should not have accepted you as a guarantor in the first place, the Ombudsman usually says the guarantee no longer stands and the debt is not yours to pay.

You can complain if, for example:

• the lender did not properly check whether the borrower could afford the loan;
• the lender did not properly check whether the guarantor could afford to pay if it went wrong;
• the risks and the commitment were not explained clearly to the guarantor before signing;
• the lender took payments without following the three-route rule in FG17/1;
• the lender did not send a proper default notice;
• the lender did not follow the two-attempt limit on continuous payment authority.

How to complain, step by step:

1. Complain to the lender first. Put it in writing, keep a copy, and give them eight weeks to respond.
2. Ask for a final response letter. This is the formal reply the lender must send. It is your ticket to the Ombudsman.
3. Take the complaint to the Financial Ombudsman. The service is free. You have six months from the final response to refer it.

How often does the Ombudsman side with the complainant on this? More often than for many other products. In the FOS's annual complaints data for 2023/24, guarantor loans had a 40% uphold rate, higher than the 37% average across all financial products that year. That does not guarantee any single case will succeed, but it does show these complaints are taken seriously.

What the FCA has actually done: the TFS Loans case

This is not just theory. The FCA has taken real enforcement action against guarantor lenders that broke the rules.

In June 2022 the FCA fined TFS Loans Limited £811,900 for failing to carry out proper affordability checks on guarantors between 2 November 2015 and 10 April 2018. The full announcement is on the FCA website.

The FCA said TFS had not properly assessed whether around 3,150 guarantors could afford to step in if the borrower stopped paying. That is a breach of CONC 5.2A.

As part of the outcome, the FCA imposed a requirement on TFS Loans to:

• provide redress to the guarantors who were harmed;
• release affected guarantors from any continuing guarantees;
• repair the guarantors' credit histories where necessary.

This case matters for two reasons. First, it shows the FCA takes guarantor affordability seriously. Second, the remedy the FCA insisted on, release from the guarantee and credit file repair, is exactly what an individual guarantor can ask for through a well-argued complaint.

Common mistakes to avoid

A few things borrowers and guarantors do that make the situation worse:

• Agreeing to a payment on the phone without doing a budget. Take the lender's details, hang up, work out what you can actually afford, then respond in writing.
• Ignoring letters. Not opening the post does not stop the process. It just means the guarantor may hear from the lender before you do.
• Not cancelling a continuous payment authority when a payment on it would leave you short for rent, council tax or food.
• Assuming the guarantor cannot complain. They can. They are treated as a customer by the FCA and by the Ombudsman.
• Paying to make the calls stop. If the payment is not affordable, paying it just to buy peace usually makes the problem come back bigger next month.
• Missing the complaint deadline. If you get a final response letter, you have six months to take the complaint to the Financial Ombudsman.

The guarantor loans market today

Guarantor lending in the UK has shrunk sharply since 2020. The biggest lender, Amigo Loans, stopped writing new loans in 2020 after regulatory action, and later wound down its business. TFS Loans faced FCA action in 2022. Several other providers have exited the market.

What this means in practice: most guarantor loans that are still being chased today were written some years ago. That is important because the affordability and pre-contract rules that applied when the loan was set up will decide whether a complaint has legs today.

If your guarantor loan was written between roughly 2014 and 2020, and either the borrower or the guarantor was struggling from early on, an affordability complaint is well worth exploring.

FAQs on guarantor loans and the guarantor's position