We understand that one’s financial circumstances can change and they might not be able to make their repayment at the end of the month. Whether there is an urgent expense or a loss of income, it helps to know what will happen if you cannot repay so that you aren’t charged extra fees and your credit score isn’t affected.
The idea of guarantor loans is that if you cannot repay, your guarantor should be able to pay on your behalf. However, the lender will always contact the main borrower first before requesting funds from the guarantor.
To ensure you have as much information as possible, our guide below explains what happens if cannot repay your guarantor loan and covers the following points:
- Collection practices by guarantor lenders
- Dealing with extra fees
- Arrangement or pay plans
- The impact to your credit score
- What you should do if you cannot repay
The lenders we feature will send you an email and text message on the days leading up to your repayment date, which is usually your pay date from work and when you should have money in your account. The purpose of receiving reminders is so that you can have your repayment ready for collection and to avoid money being unexpectedly taken from your account.
Guarantor lenders typically use a process called Continuous Payment Authority to make a collection. When you applied for your loan, your debit card would have been verified to check that it is yours and it works. Once verified, the lender can collect the money from your debit account each month automatically, making it as convenient as possible so you don’t have to make any manual repayments yourself.
In the event that a monthly payment doesn’t go through and your continuous payment authority fails, the lender will be notified and they may send you an email or give you a phone call to follow up on repayment. In some cases, repayment may have failed due to insufficient funds or perhaps the customer has new debit card details that need to be updated.
To follow FCA regulation, the lender will email or call a limited number of times to avoid bombarding the customer. The main borrower will always be contacted first to make repayment and only in the event that they cannot repay or do not respond to correspondence will the guarantor will be contacted to make repayment.
Will I be charged extra fees?
You may be a charged a one-off default fee of up to £30 by the lender for a missed repayment. The default fee will typically apply after 24 hours to give the borrower some time to pay their balance.
The customer may also be charged extra fees for every extra day that the loan repayment is late. As guarantor lenders charge a daily interest rate, the loan will continue to accrue interest if you continue to have it open for longer. For example, if you miss repayment and you guarantor loan is open for 10 days longer, you will be charged an extra 10 days worth of interest.
Setting up an arrangement or pay plan
In the event that you cannot repay, the lender is required to offer forbearance and may be able to offer some kind of arrangement or pay plan to help you repay your loan. This involves reducing the outstanding balance into smaller and more affordable repayments to help the customer clear their debt. For example, if £100 is owed, a pay plan could freeze the interest and allow the borrower to repay £25 in four weekly instalments – making it easier to repay.
Your credit score may be affected
When missing a repayment, the lender will automatically send this information to a credit reference agency such as Experian, Equifax or Call Credit. This data will then be recorded on your credit file and may cause your credit score to fall.
Furthermore, any other lenders that run a credit check on your account will see that you missed a repayment and on what date. The idea is that if other lenders can see this information, they will know that it is not worth giving you further credit as you may be suffering financial difficulty and more credit to pay will only make you worse off.
Alternatively, by repaying your guarantor loan on time, the information will be updated on your credit file stating that you make a successful repayment and this may cause your credit score to improve. So overall, your credit score can always go up or down depending on how well you have made your loan repayments.
What you should do if you are experiencing financial difficulty
If you are having trouble repaying your loan, there are several things you can do to limit the extra fees or damages to your credit score.
Speak to the lender: The lenders we feature are committed to responsible lending and will always be sympathetic if you cannot repay your loan on time. As soon as you know that you cannot make a repayment, get in touch with the lender. They may be able to freeze interest, move your repayment date or offer an arrangement to help you pay off your loan.
Don’t get another loan: It can always be tempting to apply for other loans or credit cards to pay off a debt, however, if you haven’t thought about how you are going to repay it, it can lead to a debit spiral and you may find yourself in far worse position.
Get professional advice: There are several charities in the UK that offer free advice and can help you with your debt problems. This includes the National Debtline for free online debt advice and The Money Advice Service for money advice from the UK Government.