A recent court case is a warning to lenders to give more careful consideration to the financial and other circumstances of guarantors.
Lenders may now need to satisfy themselves that people are aware of the significance of the risk they are exposing themselves to when agreeing to be a guarantor, particularly where the risk is high.
A son had asked his elderly Serbian parents to guarantee a loan for him by mortgaging their home. His parents were retired and on the pension. They spoke little English, and were not highly educated. They were advised by a Serbian-speaking solicitor.
But the court found the parents did not understand the significance of how high the loan’s interest rate was, or their son’s financial position. They obtained no benefit and bore all the risk. The judge also found that there was a real and significant risk of the son defaulting and no basis for the lender to believe the parents fully appreciated the risk they were exposing themselves to.
In looking at all the circumstances of the case, the court held that the lender’s lack of knowledge of the financial circumstances of the guarantors was a product of its own failure to enquire about those circumstances.