GUARANTOR LOANS VS PAYDAY LOANS: SPOTTING THE MAIN DIFFERENCES

When faced with emergencies or you want a loan to bridge a cash flow gap, guarantor loans and payday loans are among the main options out there for you to consider. Whereas the outcome of every loan is cash in your bank account, their processes, and terms and conditions differ.

Therefore, before applying for any loan facility, it is important that you understand the differences and how their unique features will affect your financial position. Here is what to expect from guarantor loans and payday loans.

 

What are Payday Loans

These are short term loans designed to help borrowers tide over until payday. Once approved, the loan is paid directly into the borrower’s bank account and at the end of the month, they repay the loan in full plus any interests and charges accrued. Most payday loans are available for terms not exceeding 3 months, but you can get long term loans that can be repaid in instalments.

In terms of amount, most payday loans range from £50 to £5,000 and can be approved and credited within 24 hours. Quotes are instant and no credit checks are done.

 

The Cost of Payday Loans

One of the most common attributes of payday loans is the high cost of borrowing. The Financial Conduct Authority (FCA) has regulations that guide the cost of payday loans. According to the law, there is a cap on the interest charged including default fees.

For instance, a borrower applying for £100 cannot be charged more than £24 in fees if they are taking the loan for 30 days. In case of delayed repayments, the most you should be charged is £15 default fees plus interest on the loan amount.

 

Recurring Payments

Many payday lenders require that you set up a continuous payment authority or CPA as part of the loan agreement. With the CPA, the lender takes their payments directly from your debit card or bank account whenever an instalment falls due. While this ensures that you don’t miss out on any repayment, it can be risky if you don’t have enough money in your account.

If you feel that a CPA is not the right repayment option for you, you can request for cancellation and set up other options such as direct debits and standing orders.

 

Guarantor Loans

As their name suggests, guarantor loans are unsecured credit facilities co-signed by a guarantor. Almost always, the guarantor is a person well known to the borrower such as a colleague or family member.

The guarantor co-signs the credit agreement taking an obligation to repay any outstanding balances should the principal borrower default. If you do not have sufficient credit history or your incomes are low, applying for guarantor bad credit loans can see you getting approved.

While payday loans are often for small amounts, guarantor loans range from £500 to £15,000. This means you can use these loans for major payments such as mortgage instalments, major house repairs and renovations, or even down payments for car purchases.

Guarantor loans are generally long-term loans some extending to more than 36 months. This gives you relief in the repayments meaning you will be repaying smaller amounts leaving you with extra cash to handle other issues. For payday loans, the payment periods are shorter thus making the instalments bigger.

 

Getting a Guarantor for Your Loan

As opposed to payday loans which are unsecured and pegged on your paycheck, guarantor loans require that you find yourself a guarantor. The guarantor should be financially stable, a UK resident with a debit card and a UK bank account and between the age of 21 and 75. Whether they are retired, self-employed, or employed, the guarantor must have a regular income.

The lender will examine the guarantor’s credit scores together with the borrower’s credit history to assess the amount to approve. As a guarantor, you are taking on some financial risks which could see you incur costs or getting listed for defaulted debts.

Also, when being assessed for personal loans, lenders may take into consideration all the guarantee agreements that you have signed as they represent contingent liabilities.

 

Default on Guarantor Loans

Delayed or missed repayments can have repercussions for both the borrower and the guarantor. Most lenders will give you enough time to catch up with your payments. However, if it becomes evident that you cannot repay your loan, your guarantor will be contacted so that they can take up any outstanding balances.

Recently, there has been sustained complaints about some of the biggest lenders in the UK personal loan market. Most of the complaints came from borrowers who felt that their lenders had mis-sold guarantor loans to them. In the credit lingo, mis-selling is when a lender approves a loan while knowing too well that the borrower or guarantor cannot afford it.

Loan affordability means you can be able to repay a facility on time while leaving you some money that can help you pay your bills without having to take another debt. It is the responsibility of the lender to ensure that the repayments are affordable for both the guarantor and the borrower.

In case of a default and the guarantor is called upon to pay up the balance, a record of the expected payments may be registered on their credit report thus impacting their credit score. Some lenders record the borrower’s account as a joint account right from the beginning hence showing on both the borrower and guarantor’s credit reports.

 

Conclusion

Both payday loans and guarantor loans are easy ways for you to get approved even if you have bad credit. However, the loans will differ in terms of loan size, interest rates payable, and repayment terms. If you are looking for a longer-term loan with attractive interest rates and bigger loan sizes, a guarantor loan is for you. On the other hand, payday loans can be quick to get with no need for a guarantor but their interest rates are usually very high. Before you take a payday loan, think through the alternatives available.

 

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