StepChange Guarantor Loans

As we always say, the first thing to do is stay calm! Don't rush to the phone and make promises of actions that might not be realistically sustainable. The emotional strain of a defaulted guarantor loan can feel overwhelming, but hasty decisions often make things worse.

Instead of panicking, follow these strategic steps to protect yourself financially, mentally, and emotionally. This guide will clearly outline what actions to take when a guarantor loan defaults, helping you manage one of the most stressful financial situations you may encounter.

Your first step should be to speak with the borrower and find out what has caused them to default on the loan. More importantly, is it something that can be resolved? If it's the first time you have learned about the missed payments, meaning the borrower never informed you, then it is less likely that they can resolve the situation.

Why Guarantor Loans Damage Relationships

The unfortunate truth about guarantor loans is that they can significantly strain relationships between people who are considered close. Ironically, lenders often require that the guarantor be a relative or someone very close to the borrower. This requirement stems from the emotional connection between the borrower and the guarantor.

Here's how creditors view it: "You may not care about not repaying your loan to us, but are you willing to fall out with your older brother, Auntie Susan, or even your mum and dad over this debt?"

The truth? We haven't spoken to anyone in this situation who hasn't experienced some personal fallout from a defaulted guarantor loan. Recognising this risk upfront helps you approach the conversation with empathy, even though the situation is challenging.

Key Questions to Ask the Borrower

When engaging with the borrower, concentrate on gaining a clear understanding of the following:

• What caused the default (job loss, illness, unexpected expenses)?
• Is the situation temporary or long-term?
• Do they have any way to contribute to settling the debt?
• Are they willing to work together on a solution?

Hopefully, you've clarified the situation with the borrower. We say hopefully because sometimes borrowers can "disappear," becoming unreachable. Regardless of the outcome, it's important not to wait too long before reaching out to the creditor.

Remember to communicate by letter or email, not by phone. Written communication creates a paper trail, protects you, and ensures both you and the creditor have a clear record of what was discussed and agreed upon. This is vital if matters escalate.

If You Can Clear the Debt

If the borrower cannot take financial responsibility for the debt and you are in a financial position to settle it, then it may be as simple as obtaining payment details (they may already be on the letter you received).

If this is your situation, paying the debt can:

• Stop the creditor's pursuit of legal action.
• Avoid causing additional damage to your own and the borrower's credit file.
• Allow you to move forward and put this behind you.

Let go of the past and see it as a valuable lesson. Although it wasn't the outcome you wished for, handling it promptly helps reduce ongoing stress and financial worries.

If You Cannot Afford to Clear the Debt

If paying off the debt in full isn't an option, assess your alternatives. Use our template letter to propose a payment plan. This can initiate a discussion and clarify the creditor's intentions.

You might be asked to fill out an income and expenditure form. Fortunately, our budget planner simplifies this process. Just input your figures, and it will handle the rest, providing a clear overview of what you can realistically afford to pay each month.

Remember that, as a consumer, the Financial Conduct Authority (FCA) protects you regarding guarantor loans. However, some creditors might still resort to aggressive debt collection tactics, such as threatening court proceedings.

Understanding Your FCA Protections

The FCA provides clear guidelines on how creditors and debt collectors should behave. Understanding these regulations helps you:

• Know your rights during debt collection
• Recognise when collectors exceed their authority
• Make informed decisions about payment arrangements

If a creditor threatens court action without taking your financial circumstances into account, this may amount to aggressive or unfair debt collection practices.

If Court Action Feels Inevitable

If you face a situation where court action is a real risk and you cannot clear the debt, you may want to explore alternative options. While we do not recommend borrowing, you might consider:

• Clearing the debt via a personal loan (if you can obtain one)
• Using a credit card with a 0% introductory period

These options give you flexibility if payments become difficult. You can make smaller token payments using our Token Payment Method, offering more control than a guarantor loan or defaulting on the debt.

Explore Your Broader Debt Management Options

What options does TRDG offer? We thought you'd never ask! Visit our unsecured debt section to explore your full range of choices if you need them. Knowing all the available routes helps you make an informed decision rather than feeling trapped.

If you have already received a claim form, don't panic! It indicates that the creditor has chosen to pursue court action, but you still have options and rights.

A claim form is a formal legal document that means:

• The creditor is seeking a County Court Judgment (CCJ) against you
• You have a limited time to respond (usually 14 days)
• Failing to respond will likely result in a default judgment against you
• Your credit file may be negatively affected for six years

Read our guide "What is a County Court Judgment (CCJ) and can it be stopped?" to learn how to deal with this situation and your options. Understanding your rights and the proper legal procedures at this stage is critical. You may be able to defend the claim, negotiate a settlement, or arrange a payment plan before a judgment is entered against you.

Once you have dealt with your unfortunate situation, you might want to try and recover or at least minimise your loss. If the borrower has the means or their circumstances improve, there could be an opportunity to recover some of what you've paid.

Having a Difficult Conversation About Repayment

Try to speak with the borrower to see if they can make a payment toward the debt. Recognise that emotions might be intense, so pick a time when you're calm and both of you are prepared for a respectful discussion.

Remember, this situation will not define you; learn and grow from it. The relationship damage is already done; now it's about practical solutions.

Setting Realistic Expectations

Be realistic about your recovery. Since they defaulted, it indicates limited financial resources, so:

• Don't expect full repayment
• Be prepared to write off some or all of the loss
• Focus on whether the relationship is worth preserving

The Real Debt Guy is a qualified financial adviser and a UK debt expert. The information in this article is considered to be true and correct at the publication date.