Guarantor Loans

July 7, 2014

Why they might be the cheapest and fairest of the “Alternative Credit” products

When looking for a loan there can really be just one question; can I borrow from a mainstream lender (bank, building society or Hire Purchase specialist) at low, headline, rates of interest? If the answer is yes, then you don’t need alternative loan providers at all; they will be far more expensive and you should approach your bank.

 

If, however, you can’t borrow from this source then consider carefully where you might borrow those needed funds, your ability to make the repayments (affordability) and how spreading the loan over a period of smaller fixed payments might help your personal circumstances.

 

And then look at the real costs of borrowing.

 

Guarantor Loan

  • £500 – £5,000
  • Up to 5 Years to repay
  • Structured monthly payments (cost of borrowing £500 over 1 year = £114.40 ie total repaid £614.40 )
  • APR 48%
  • No assets or security required (you do need a friend or family member to Guarantee your loan)
  • You can’t lose your valuables or cherished possessions if you miss a payment
  • Funds typically transferred within 48 hours, some quote same day
  • No credit checking on borrower
  • Only pay interest for time borrowed (daily)
  • No fees or charges

 

 

 

 

 

Month 1 cost £16.60

Pawn Broking

  • £20 – £1,000 (in theory unlimited, but based on value of assets pledged)
  • Up to 6 months
  • Nothing to pay until redeemed when 100% of advance & interest must be paid (cost of of borrowing £500 over 1 year = £600 ie total repaid £1,100 ! – based on typical high street charges) assumes asset value supports a re-loan at 6 months
  • APR 125% (typically)
  • Must have assets to pledge; usually Gold or Jewellery (can be artwork, expensive cars etc)
  • You can lose your valuables or cherished possessions if you don’t pay back the original advance and interest when due.
  • Funds transferred on presenting valuable assets (the pledge)
  • No credit checking
  • Only pay interest for time borrowed (usually in monthly increments,)
  • Typically no fees or charges

 

 

Month 1 cost £40.00

 

Payday Loan

  • £1 – £1,000 (often to a maximum of £400)
  • Up to 1 month to repay (sometimes extended to 2 or 3 months)
  • 100% repayable within 31 days (cost for 1 month £165.50, total paid £665.50 cost of £500 over 1 year will exceed £2,500 !!! ) illustration for 1 year assumes you switch lender to maintain the original £500 loan
  • APR 5,853% (market leader)
  • No assets or other security required
  • You can’t lose your valuables or cherished possessions if you don’t pay
  • Funds usually transferred to your bank account same day
  • Credit checked
  • Only pay interest for time borrowed (daily)
  • Fees and charges apply

 

Month 1 cost £165.50

 

Rent to Own Assets

  • Value of home appliances or electrical goods, consumer electronics up to £4,000
  • Up to 2.5 Years to repay
  • Structured Weekly payments (cost of borrowing £500 over 2 years = £306.90 ie total repaid £806.90 )
  • APR 69.9% (varies based on asset)
  • You can’t lose your valuables or cherished possessions if you miss a payment, but goods on rent maybe removed
  • Goods (typically) delivered within 7 days

 

 

 

Month 1 cost £22.50

(but based on OVER PRICED asset cost!!)

 

By looking at the table above you can see on a pure cost basis that a Guarantor loan is by far the cheapest of the 4 products compared.

 

You will also see that only the Guarantor loan and the Rent to Own product (which can only be used to acquire assets like TVs or Fridges from the Lender!) offer regular repayments that pay off the original loan and all interest.

 

But beware of Rent to Own offers, these often involve you committing to purchase overpriced assets with ADDITIONAL high interest costs. Always look at what the item might cost from an alternative seller, say Curry’s or Amazon, and how a Guarantor loan might be used to fund this lower cost purchase, further saving you money and reducing the loan repayments and period.

 

So, the only obvious downside to a Guarantor loan is that you need a Guarantor. Financially it makes sense to consider this option even where you may have to explain to a good friend or family member why you need the loan and why you need them to support you. It can also help you rebuild a poor credit rating, so if you have to take on a loan, this may easily be your best alternative.

 

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