Payday loan Companies were quick to flourish under the financial climate of the recession. But unfair fees and high interest rates attracted a lot of criticism, which forced the FCA to step in to introduce new legislation to protect consumers.
Although many payday loan companies now promise to be more transparent about their fees and charges, it is wise to remain wary. Since the sweeping changes to the payday loan sector, it now looks like the FCA are clamping down on guarantor lenders, with Amigo Loans being told they need to review their customer journey.
With that in mind, it can be a tough choice to decide whether to choose a payday loan or a guarantor loan. Being slightly different products, we’ll review how they are different and the advantages and disadvantages of getting a loan with or without a guarantor.
Guarantor loans are secured short term loans and are an example of how lenders can provide responsible alternatives to individuals with weak credit history, who may be disadvantaged from taking out multiple emergency loans or rolling bridge loans.
Offering lower APR rates for borrowing, transparent costs, and the ‘feel-good’ factor of helping a friend or family member to borrow money has led to a surge of interest in guarantor loans from borrowers and lenders alike.
Guarantor Loans Require A Co-signer
Guarantor Loans provide a new way for a borrower with bad credit to access a loan. Essentially, to get a guarantor loan it requires you to get a friend or family member to co-sign the loan. This means if you miss the loan repayments, they are responsible for making a repayment.
Having bad credit severely limits your borrowing options. Often, it’s impossible to get credit, or crippling APR rates can exacerbate existing financial problems. And having a guarantor as security against the loan will enable you to both borrow and repair a poor credit score. The guarantor does have to be financially viable, and willing to take over responsibility for the loan if necessary.
The guarantor will also need to have a good credit score. These individuals stand as security in the event that the borrower defaults on loan repayments. Individuals with weak credit histories, such as a young student, may benefit greatly wn a parent or relative serves to guarantee their short term loan.
What Can You Use A Guarantor Loan For?
The opportunities that guarantor loans may be used for include education, business development, or purchasing a car. This use of secured credit enables individuals to develop themselves and their future earnings potential, while lowering financial strain. Some people use guarantor loans to consolidate their financial circumstances and gradually make repayments at an affordable pace.
Finding A Guarantor
Being a guarantor for a secured short term loan is a means of helping someone to improve their circumstances without having to give them money. Family members may lend a hand, or friends may step in to vouchsafe the loan. Employers or others in the community may offer such support. Seeking a trusted person to agree to be a guarantor, and gaining professional guidance, will help potential borrowers to understand their credit responsibilities for successful, secured borrowing.
It can be difficult trying to find somebody to secure your loan, which is why You can find loans without a guarantor on My Financial Broker.
Advantages Of Guarantor Loans
- Loan amounts can go up to £10,000
- Can get a loan if you have poor credit
- Terms can go up to 5 years
- Lower APR
Disadvantages Of Guarantor Loans
- Application time frame can be slower
- The guarantor must have a good credit score and over the age of 23
- Repayment amounts can be high
Payday lenders offer loans under £1000, normally over 31 days, and require you to repay the loan in one lump sum once you’ve got your income. They are typically used to cover a shortfall or an emergency. This loan is normally paid straight through your bank with many lenders operating online. This is usually minutes after application.
Payday loans are designed to pay back on your next payday therefore they are only taken out for a short amount of time so there is less time to incur interest. When the due date approaches, it is taken directly from your account plus the interest.
Payday Loans Are Flexible
Payday loans can be flexible – For example if you are struggling to pay companies have options such as term changes, deferrals, accounts on hold and payment plans.
A payday loan is a form of high cost short term credit, so although an initial loan may be harmless, repeatedly borrowing them can lead to a snowballing debt situation.
Risk Of Debt Spiral
Payday lending is a form of high cost short term credit, so although an initial loan may be harmless, repeatedly borrowing them can lead to a snowballing debt situation.
Some borrowers are tempted to take on another payday to settle the first one. It should not be used even when you have money but should be used in times of emergencies or when you are confident that you will repay it back.
Available For Most Types Of Borrowers
Payday loans are designed to be easy and simple to access by almost everyone. There are no major criteria to qualify for these unsecured loans. As long as a person is of legal age and can show proof of employment and expected income they can qualify and take out a payday loan. Compared to other conventional loan sources, payday loans are easier to qualify for and are a type of no guarantor loan.
Unlike most other loan types and sources, a person’s ability to be approved for the loan does not depend entirely on their credit history or rating. Usually, lenders use the credit rating of a borrower to measure the risk associated with lending to that person and making lending decisions. People with poor credit usually find it hard to access regular loans or have to pay higher for it.
Advantages Of Payday Loans
- Can get a payday loan with bad credit
- Fast application and payout if approved
- Lower APR
- Flexible repayment options
Disadvantages Of Payday Loans
- High APR
- Can impact your ability to get certain financial products like a mortgage
- Can be a risk of falling into a debt cycle
What Are The Similarities and Differences Between Payday Loans And Guarantor Loans?
There is a distinct difference between guarantor loans and payday loans, the obvious one being that guarantor loans require a credible guarantor, a person who financially vouches for whoever is taking out the loan. These types of loans are intended for people who are looking for bad credit loans, on the other hand, are secured on the borrower’s next income payment. Both are forms of unsecured lending.
How an individual benefits from a guarantor or payday loan depends on their borrowing needs and existing financial circumstances. With a credit worthy guarantor, interest rates are likely to be more favourable than payday loan fees.
Borrowers taking out a guarantor loan or a payday loan are both under an obligation to meet their debt payments on time. If a payday loan borrower defaults, additional charges may be added, incurring higher borrowing costs. With guarantor loans, if a borrower defaults, the debt payment may be claimed from the guarantor.
The guarantor loan provides more flexibility in terms of amount, duration, interest rate and monthly repayment amount. Each lender has different lending criteria for each loan type. Comparing what lenders offer may provide cost-savings in the long run.
Whether looking for a short term loan, or a longer loan, aspects to consider include the purpose of the loan; the amount required; payout timing required; potential repayment duration; affordability of loan repayments and likelihood of loan approval. Seeking professional advice will help the individual concerned select the most suitable loan for their requirements.Apply Now!