I’ve been wanting to write this post for a while. In fact, since I started noticing a lot of ads for companies like TrustTwo, Buddy Loans, and Amigo Loans. ‘Surely guarantor loans aren’t a thing now,’ I thought to myself, ‘Have we learned nothing from the payday loans debacle?’ So I started googling, and to my dismay I discovered there are actually more guarantor loan companies emerging than you can shake a stick at.
What exactly is a guarantor loan?
It is defined as a credit product in which the borrower asks a guarantor, typically a friend or family member, to agree to act as security for a loan. If the borrower defaults, the lender can chase the guarantor for payment. These products are similar to payday loans in that they are delivered quickly, often within 24 hours, and they are promoted to people with bad credit. However, Citizens Advice notes they are often for larger amounts – between £1k and £7.5k, compared to an average payday loan size of £260. Their interest rates are lower than payday loans but still very high at between 39.9% and 49.9% – the average is 46.3% – and they last longer, between 12 and 60 months.
The FCA (the financial regulator) introduced a cap on payday loans at the start of the year and, by June, Citizens Advice had reported a 45% drop in the number of complaints it dealt with related to payday loans. But it is concerned the problem is simply being shifted elsewhere with the rise of these new lenders.
Why should we worry?
These companies may use the word ‘buddy’ and ‘amigo’ and have cheery adverts and slogans, but I doubt whether you would still be buddies with your guarantor if he ended up saddled with your very high interest loan. A major problem is that guarantors often don’t realise what their role is when they sign on the dotted line – far from being simply a ‘character witness’, they can be chased for the outstanding debt even if the original borrower dies! And even if no-one dies, your friendship certainly will if you are unable to meet repayments and your guarantor is subject to aggressive collection tactics.
And then there is the issue of affordability and the eye-wateringly high interest rates offered to these ‘sub-prime’ borrowers. Citizens Advice gives the example of someone they helped who took out a £5k loan, repaid at £197 a month. After making payments totally £7k, only £1k of the loan capital had actually been repaid. That is truly shocking.
But people with poor credit still have the right to borrow if they want/need to. So what’s the solution?
CREDIT UNIONS! I don’t understand why they aren’t more popular, credit unions are amazing. It seems to be a little known fact that they generally have a mandate to help their members get out of debt, and this includes lending you money at a reasonable rate regardless of your credit rating. Instead, they will make you do a budget and will lend based on their assessment of your ability to repay. In the past, credit unions had stringent criteria to join, such as your profession or the borough you live in, but now they are much more open so it’s easier to become a member. Usually, in order to borrow from them you need to save a small amount each month, to help you build up a small savings pot and reduce the need for future borrowing.
So that’s my tuppence worth on guarantor loans, but probably not the last I will write about this subject. Fingers crossed the regulator has something to say about these products pretty soon, before they become the next financial nightmare for consumers.