Oh how wrong can you be.
Reported in the Guardian, Stella Creasy, the Labour MP for Walthamstow was credited with saying “Guarantor loans are a trap”. First let us say that we support Stella in championing the consumer against usury, and unscrupulous lenders. As a segment most if not all payday loans were probably usury and some lenders were worse than others, but to put Guarantor loans in the same category is not just unfair to Guarantor loans in general but Stella may be doing more harm than good. If consumers are put off looking at structured, affordable, repayment loans as a substitute for very high interest unsecured borrowing such as payday loans, asset loans (eg Brighthouse) then desperate borrowers will still seek Payday loans or worse.
The Guardian article implies that Guarantor loans are not subject to regulation, when patently they are.
Guarantor loans are consumer credit loans governed by the CCA and regulated by the FCA.
Whilst Guarantor loans are not ‘capped’ like payday loans, the cost of a typical guarantor loan remains significantly cheaper than a payday loan and more importantly allows modest, regular payments to repay the debt, unlike a payday loan. All registered credit providers are currently being vetted by the FCA to ensure a good, regulated and competitive market place whilst weeding out the cowboys.
So why are Guarantor loans not only better than payday loans, but for poorly rated borrowers possibly their best and lowest cost option?
Because Guarantor loans can do 4 significant things for poor credit scored borrowers;
Replace high cost borrowing with lower cost borrowing (do shop around!)
Improve a person’s credit score over time
Confront (or share) any immediate debt issues with a good friend or family member
Lower the overall cost of a loan and convert debt into affordable monthly repayments matched to regular income
This is not an advert for new borrowers, or existing borrowers to take on more debt, rather a call for those excluded low cost mainstream credit, but who NEED funds, to be more critical in their choice. The Big Banks are not lending to anyone but those with the best credit scores or where they can provide decent security, or both. For the rest it is important to shop around, get the best deal and ensure the monthly payments can be met comfortably ie, are affordable. So shop around, compare rates but also only work with a company that has a good reputation in the market. And sort out a suitable Guarantor and get their agreement before applying.