Guarantor Loans: A Smart Alternative to Payday Lending

If you happen to have a good credit score, you will be fortunate enough to be able to benefit from near record low borrowing rates on a wide range of credit products, such as loans, credit cards, overdrafts, and mortgages. If on the other hand your credit score is less than perfect, the red carpets will quickly be rolled back and the doors to the mainstream lenders will unfortunately be slammed shut. Much to the fury of many consumers, the banks and other mainstream lenders remain very cautious and risk averse when it comes to the subject of consumer lending, which has strongly worked in the favour of the payday lenders.

People turn to payday lenders for lack of a better idea

The constant barrage of TV adverts and press surrounding the payday lenders means that they are more often than not at the forefront of people’s minds, so when somebody is rejected by their bank, it is often the payday lenders who have been the first port of call immediately after. And make no mistake, they are convenient! But however convenient their quick pay outs and a no questions asked approach to lending may be, the simple fact is that the enormous interest rates of easily over 4,000% APR can be crippling and there are hundreds of thousands, if not millions who have quickly found themselves struggling in a debt spiral after their payday loan repayments have spiralled out of control. With this in mind it is unsurprising that consumers have increasingly been turning to alternative means of borrowing money when they are in a financial pickle, and of all the alternatives out there, guarantor loans have increasingly become the borrowing option of choice for those with poor credit.

What is guarantor lending?

Guarantor lending may appear at first glance to be a new approach to borrowing but it is in fact a throwback to a more old fashioned form of borrowing from years gone by. A guarantor loan applicant will be asked to find a friend, family member, or colleague to co-sign their loan and act as their guarantor, and in return for this they will be able to borrow small to large sums of money over a short to longer-term time frame. And more importantly, not only will a guarantor loan be flexible but it will also offer much lower rates of interest and a much more affordable loan all round. A borrower will be able to borrow anywhere between £1,000 to £7,500 over a 1 to 5 year period, but importantly they will be able to do so at a much more reasonable 47.9% APR; just to paint a picture, a guarantor loan of £3,000 taken out over 3 years will cost £143.98 per month in repayments. Now this, compared to a payday loan which charges around £25 for every £100 borrowed, represents a much more suitable borrowing option if you are looking to consolidate debt, replace a car, or cover a large unforeseen expense. Your guarantor, who will need to have good credit and be between 25-65 if they are a tenant or 25-72 if they a homeowner, will not be contacted under any circumstances unless the borrower cannot meet repayments. So if you need to borrow, why not go for a guarantor loan?

What does it take to be a Guarantor?

Being a guarantor is something that you may have heard of before, as the idea behind having one has been around for a long time. The re-emergence of guarantor lending since the recession has brought guarantors out into the open again, although they never really went away.

If you have ever rented a home then it’s likely that you would have had to get a guarantor for your rent (this is particularly common for university students or for those who have moved out of home for the first time. It’s also common to ask anyone on a relatively low income to have a guarantor in place). A guarantor is someone who you know well, who is more established than you are financially, who could pay your rent in the event that you don’t, for whatever reason. They would have to sign an agreement committing to this, and it’s likely that they’d be credit checked to confirm that they are who they say they are.

In the distant past, long before telephones or computers and credit checks, if you wanted to borrow money then a guarantor was a staple of the application process. It’s likely that they would act like a ‘sponsor’ and be known to the bank manager. The loan would be paid out on the condition that the guarantor was an upstanding member of society – the bank manager would know their financial situation and would help you out on the basis that they could vouch for you. Back then, status was everything, whereas nowadays the class system has pretty much lost a lot of its former power.

Guarantor loans have emerged again in the years after the recession hit, as all of a sudden access to easy credit has been greatly reduced. Before the financial crash, the banks were happy to lend money to many different people without doing a huge amount of pre-payout checks. This was a good time for the economy in the sense that people were spending money, but unfortunately not all of what was borrowed was making its way back to the banks, as they had agreed to lend out much more than customers could afford to pay back. Now that the banks have tightened their lending criteria, many people have been left out in the cold when it comes to credit, but guarantor loans can now utilise the ‘vouch for’ benefit which featured heavily before the boom years.

If you've been asked to be a guarantor for someone, then you’ll have to fit into set criteria depending on the company your friend/relative is applying to. Usually guarantors need to have a decent credit history, must have enough income to pay back the loan in question (while this is rare, it does sometimes happen) and will ideally trust the borrower to pay back the loan on their own. Many guarantor lenders require the guarantor to be a homeowner, but some lenders do offer tenant guarantor loans at a slightly higher rate of interest.