Guarantor loans in the UK are still a small part of the lending market. But for anyone with a less than perfect credit score who needs to borrow money, they’re a good alternative. To high interest short-term loans in particular. They could also useful for consolidating small loans with a higher APR.
A guarantor loan is a loan usually guaranteed by a family member or friend of the borrower. Someone known as a guarantor. In a report by Citizens Advice, guarantor loans currently represent a small part of the lending market.
Yet they are growing in popularity. Data from Companies House shows the largest guarantor lender’s profits (Amigo) grew 40 per cent from 2013 to 2014.
This type of guarantor loan is a new phenomenon. Yet it bares similarities to the old-fashioned type of banking. This is where banks would take the word of a reputable friend or family member.
This person would state that someone was ‘good’ for the money. Except in the case of guarantor loans, it’s not just the guarantor’s word they’re taking. They’re asking the guarantor to risk their financial future on the borrower. If the borrower doesn’t pay the money back, the guarantor is signing to say that they will.
Comparing UK Guarantor Loans
Like payday loans, you can usually get guarantor loans within 24 hours. A much quicker way to get a loan than from a high street bank, where the process can take weeks or even months. Yet, their main difference to payday loans is in their lower interest rates and larger lending amounts.
£260 is the amount of the average payday loan. Guarantor loans are usually between £1,000 and £7,500. This makes guarantor loans a viable alternative. Especially for borrowers who need a larger amount of money than payday loans are useful for.
Interest rates on guarantor loans, average at around 46.3 per cent. This is according to the Citizens Advice report. A rate much lower than the typical payday loan interest rate which could vary into the thousands of percent. The amount of time a borrower has to pay back guarantor loans is also longer. Their term usually lasts from around 12 to 60 months.
Who can be a guarantor in the UK?
In order for someone to be a guarantor, they must be over 21 and own a home in the UK. This is unless the loan is for a small amount – then they just need a good credit rating. Unfortunately, your spouse cannot be a guarantor. Nor can anyone else who is ‘financially linked’ to the borrower.
Guarantors are usually friends or family members. This is because they know and trust them and are willing to co-sign the loan agreement. A guarantor is signing something to say that if you don’t pay your instalments, they will.
Citizens Advice have also reported a lower number of complaints from guarantor loans than from payday loans in the UK. Only 530 people goto see them with an issue on guarantor loans for April 2012 to April 2015. In 2015 alone, Citizens Advice recorded 29,000 cases due to issues with payday loans.
It’s worth re-iterating that guarantor loans are currently a much smaller market than payday loans. Which is one of the reasons why complaints to Citizens Advice are fewer.
UK guarantor loans are generally for people with a poor credit rating. If you have a good credit rating, you should be able to get a better interest rate on a loan from a high street bank. But, if you don’t have a good credit rating, guarantor loans have much lower interest than short term loans. Something to consider as an alternative.
Before signing up to any guarantor loan, we recommend you use a comparison site. Compare the various options available to you to get the best loan for you.
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