Why Guarantor Loans are a better option than a Payday Loan
Payday loans have become notorious in recent years as a form of borrowing that leads many people into serious debt-related difficulties and it isn’t difficult to see why. The interest rates associated with payday loans are nothing short of astronomical and they commonly equate to in excess of 1,000 % APR.
Although payday loans, as their name suggests, are only designed and marketed as short-term facilities, the reality in so many instances is that even small loans can quickly become much larger debts leading to insurmountable arrears.
What’s the appeal of a Payday Loan?
It is easy to criticise payday loans and lenders for luring borrowers into deals that end up being disastrous from a personal finance perspective. But there is clearly plenty that appeals to consumers throughout the UK and elsewhere in the world about short-term loans, even when they have sky-high interest rates attached. So what is it?
Well, first and foremost, there is the accessibility of payday loans, which are generally made available to individuals whose credit records might preclude them from taking out loans with more traditional lenders such as NatWest Bank or other high street lenders.
In addition there is also the convenience factor, which is easy to underestimate but which makes a huge difference from a borrower’s perspective. In most cases, with the major payday lenders we are all familiar with, it is possible to make a loan application, have it assessed and have the money in your bank account within a matter of a few hours.
This level of convenience is enormously alluring to people in any number of situations in which cash is tight and quick access to finance is deemed priceless. The problem of course is that short-term decision making in the context of very high interest loans can just as quickly become a source of major concern and real regret.
What are the other Personal Loan options?
The reasons why people take on payday loans vary a great deal and no two situations will ever be exactly the same. However, very often, these loans will be taken on as a stop-gap measure and in response to some form of personal financial crisis.
Clearly, in an ideal world, all of us will have some measure of savings set aside to cover unexpected expenditures, if a boiler breaks or a car needs fixing, for example. But, unfortunately, this isn’t the case for many of us and so, when disasters strike, the list of options in terms of finding access to finance will often be very limited.
You might be able to borrow money from friends or relatives but, even where this is possible, it can be a demoralising and difficult thing to do. You might also look to make payments of various sorts on credit cards but this again isn’t always an option.
So, if you are in the position of needing cash quickly for any reason but your options for accessing credit appear limited, then payday loans can seem like the last resort. But guarantor loans should also be considered; at least if you’re looking to limit the scale of fees and charges you might ultimately end up paying.
Guarantor loans are an often overlooked form of unsecured borrowing that involves an applicant co-signing a loan deal with someone who can guarantee repayments as required. (The co-signer cannot be someone with direct financial relations with the applicant, which discounts the option of partners offer guarantees on one or the other’s behalf).
In order to make a successful guarantor loan application with companies such as George Banco or Glo, you will of course need someone willing to co-sign the agreement and ensure repayments will be made even if you become unable to make them. So there are potential hurdles to cross in terms of reaching the point of receiving funds through such a loan arrangement but the interest rates associated will then be far lower than those linked to payday loans.
In fact, while APR rates vary from deal to deal and from provider to provider, a guarantor loan typically has an interest rate that equates to paying back roughly 50 % of a borrowed amount over the course of a year. So, if you were to borrow several thousand pounds for a fixed term then your monthly payments would be fairly sizable but they would certainly be far more manageable than would be the case with a payday loan.
Long term Personal Finance planning
The key advantage of guarantor loans as against payday loans is that they involve far lower repayments by any measure. Both forms of borrowing can usually be accessed by people with bad or indifferent credit ratings but only guarantor loans can really be considered useful financial tools in any sort of long-term context.
The reality is that payday loans very often become incredibly burdensome whereas guarantor loans can be used sensibly as part of a longer term financial plan.
Falling into financial difficulties and leaving your loan guarantor with responsibility for your debts is certainly not beyond the realms of possibility, but debts will not mount up nearly as quickly as they would with payday loans.
Ultimately, while payday loans can be very tempting for anyone struggling with any kind financial emergency, they are usually far less safe as borrowing tools than guarantor loans. Regulatory changes are being introduced to curb some of the most unhelpful and arguably unfair practices of payday lenders in the UK but their loans nonetheless remain extremely expensive and generally best avoided under any circumstances.
For more impartial information on responsible lending you can visit the Money Advice Service.