Guarantor loans: an alternative to payday loans?

by John Fitzsimons on 20 August 2012  |  5 comments
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Amigo Loans says borrowers are turning to its guarantor loans to consolidate their payday debts. So are guarantor loans a decent alternative to payday loans?

An email drops into my inbox. Amigo Loans, the guarantor lender with the cheeky chaps in sombreros in its TV ads, has seen a big jump in applicants looking for a loan to consolidate their debt.

And the cause of that existing debt? Payday loans.

The payday trap

Not that long ago, payday loans were a bit of an unknown, without a lot of exposure.

Now, they are everywhere, sponsoring primetime TV shows (Red or Black, which Ant and Dec have taken a kicking for), football league clubs, even popping up on cashback websites, as I wrote about in Cashback websites profiting from payday loans.

And because they are so visible, they are becoming a default option for some. Research from Turn2us and the Consumer Credit Counselling Service (CCCS) found that more than a quarter (27%) of people who had taken out a payday loan had done so without checking out alternative sources of cash.

In other words, upon hitting a few money issues, the first thought was to take out a payday loan to help them get by for a while. They could worry about other options tomorrow.

But tomorrow never comes. One payday loan becomes two. With four figure interest rates, that debt quickly mounts up. That’s why the National Debtline has taken 9,500 calls about payday loan debts already this year, up by an incredible 116% on the same period last year.

Consolidate your debts into one simple payment!

That’s where Amigo Loans seems to be benefitting. It’s not hard to see why. If you’ve built up debt, whether it’s £500 or £5,000 would you rather pay 4,214% on it (Wonga’s representative APR) or 49.9% from Amigo?

The idea is that paying off that debt is therefore a lot cheaper.

It’s also a lot easier. You money is going out on just one loan, rather than perhaps on a range of outgoings. Why wouldn’t you want to do that?

The problems with debt consolidation

The biggest issue with debt consolidation to me is that it requires discipline on the part of the borrower. Sadly, once many borrowers see that their debt spending has now been reduced, they go straight out and start borrowing again.

It’s the same as people moving debt from an old credit card onto a 0% balance transfer deal, and then going on a shopping spree with the old card. What was supposed to help you reduce your debt only leaves you further in the red.

The CCCS has put together a really good guide on debt consolidation loans which is worth a read.

Paying a 50% interest rate

And then there’s the interest rate. Yes, 50% is a lot lower than 4,000%. But it’s still eye-wateringly high.

Amigo’s answer is that a guarantor loan is not a mainstream option. If you’ve got a decent credit record, you can get a loan far cheaper than that. But if you don’t have a good credit record, but still need a loan, that’s the sort of rate you will face.

Having looked around a little, that seems to be true when it comes to guarantor loans. GBP Loans boasts a representative APR of 53.8%, while Whitestar Loans reckons its typical APR is 46.2%.

And taking out a guarantor loan doesn’t involve your credit record coming under any scrutiny either – it’s the guarantor, the person who agrees to cover the loan should you fail to make your payments, who gets checked instead. As Amigo says, if somebody trusts you enough to be your guarantor, that’s all they need to know.

And should you keep up your payments, Amigo will write to the credit agencies on your behalf, so that you can rebuild your credit record – something that wouldn’t happen if you borrowed directly from your friends.

Mixing money with your mates

Personally I’m deeply uncomfortable with the idea of mixing finance and friendship. But Amigo believes that, as friends or loved ones have committed to being the guarantor, the borrower is more inclined to keep on top of the repayments, to keep paying up. They don’t want to let the guarantor down.

I can certainly believe that is a powerful motivation. I’m just not sure it’s one I’d ever sign up for in the first place.

A payday alternative?

There’s no doubt that a guarantor loan is a cheaper option than going for a payday loan. But there are a number of other alternatives too, which we detailed in The best alternatives to payday loans, many of which are cheaper than guarantor loans.

So what do you think? If you were swamped with payday loan debt, would you turn to a guarantor loan to consolidate it? Or is there no need to mix money and your mates?? Let me know your thoughts below.

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