Are Guarantor Loans Legal?

Since the effective end of payday loans for subprime borrowers, guarantor loans have surged in popularity. In this article, we question whether they operate entirely within the bounds of the law—or if they occupy a questionable legal grey area. To be clear, we’re not asserting that guarantor loans are illegal or outside the FCA’s rules, but there are certainly areas worth examining.

When the FCA began regulating the sector, we saw a steady disappearance of loan products from the market. It has been a near-gimmick-like attack on the short-term lending industry. Products charging 4,000% APR vanished, replaced by loans charging around 50% APR. Loans under £500 are now significantly harder to find due to the price cap regulations.

For headline-grabbing politicians, this is a success. But for the public, the reality is different. Paying 50% APR on a £1,500 loan over several months may appear cheaper than paying 4,000% on a £200 one-month loan, but the actual cost is often higher. The new statistics might look good in soundbites, but they don’t reflect the burden now placed on borrowers.

To fill the void left by payday loans, guarantor loans have emerged, offered by providers like Amigo and Glo. These loans require borrowers to find someone—a friend, family member, or acquaintance—to act as their guarantor. The guarantor essentially promises to repay the loan if the borrower fails to do so. At least, that’s how it’s marketed.

In reality, the process often works differently. The lender provides the loan funds to the guarantor, who then gives the money to the borrower. This raises an important question: why doesn’t the guarantor simply take out a loan from a bank and lend the money directly to the borrower at a much lower interest rate?

More importantly, this structure may raise legal and tax concerns.

Under the current structure, funds are transferred from the lender to the guarantor, not directly to the borrower. The guarantor then transfers the money to the borrower. This effectively makes the guarantor the lender to the end user.

However, the guarantor is unlikely to hold a lending licence. Technically, this flow of funds could mean that the guarantor is engaging in unlicensed lending, a potential breach of the law.

The borrower is making repayments on a loan that is technically owned by the guarantor. From HMRC’s perspective, these repayments could be classified as income for the guarantor. This would mean the guarantor is required to declare the repayments as income on their Self Assessment tax return and pay any applicable tax.

For example, if the borrower switched the repayment bank account details to deduct payments from their own account rather than the guarantor’s, they are essentially providing the guarantor with an income. This creates a tax liability for the guarantor, just as any other income would.

The guarantor could avoid paying tax on the repayments by declaring the money they gave to the borrower as an offsetting “cost.” However, they could only do this if they were registered as a business. To operate as a business that lends money, the guarantor would require a lending licence.

These points highlight potential legal and tax issues with guarantor loans, particularly the flow of funds from lender to guarantor to borrower. While these loans are technically legal and within FCA guidelines, they raise questions about compliance with other laws and regulations.

Guarantor loans are also extremely expensive. Borrowers and guarantors alike should exercise caution before entering into such agreements, particularly with friends or family members.

We’ve heard from individuals paying back guarantor loans at eye-watering rates. One borrower we know of is repaying a £5,000 loan from Amigo with a 50% APR. His monthly repayments are approximately £230, of which £210 goes toward interest. While he’s relieved to pay 50% APR instead of 4,500% APR, the overall cost remains substantial.

Perhaps he’ll send a thank-you note to the “money-saving experts” one day.