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Due to the recent collapse of Wonga, payday loans have been all over the news lately. With such bad press, people are beginning to search for other means of quick and easy credit, one of which is the guarantor loan.*
A guarantor loan is a form of loan which is secured by someone other than the person borrowing the money. The guarantor promises to pay back any money borrowed if the borrower is unable to make a repayment, making these loans an option for people with poor credit ratings. **
The guarantor can be anyone, but they’re usually a family member or friend of the person borrowing money. Because of this often close relationship, people who agree to be guarantors aren’t expecting to have to pay anything back and trust the person getting the loan completely, despite their poor credit rating.
Whilst you might say that a guarantor should be prepared to pay on behalf of their friend or their family member (after all, why agree to be a guarantor if you aren’t prepared to pay?) what many guarantors don’t know about is the high interest rates that come with guarantor loans.
At 49.9% APR, Amigo, one of the UK’s leading guarantor loan lenders, would charge a borrower £23,715 for a £10,000 loan over five years. If the borrower couldn’t afford to repay their debt for any reason, the guarantor would find themselves in almost 24k of debt***.
Whilst this isn’t at the extortionate levels of interest previously charged by Wonga (5,853%, eventually reduced to 1509% after new Financial Conduct Authority regulations) it still marks a considerable amount to pay back, especially if the guarantor isn’t expecting it****.
In one case, a borrower ended up with a total repayment figure of £13,043.42 from a five year £5,500 amigo loan. After missing a payment by a single day, Amigo immediately contacted his guarantor. Within a week, Amigo were piling the pressure onto his guarantor, warning him that his credit rating would be negatively affected if he didn’t settle the debts of the person he agreed to be the guarantor for*****.
Whilst in this case the person in debt managed to make repayments themselves, it highlights how quickly an unsuspecting person can land themselves in debt without even borrowing any money themselves. If you’re thinking of becoming a guarantor for someone, remember to read the small print!
If you’re considering a guarantor loan to try and clear some of your existing debts, there could be a number of other options available to you. Some of our personalised debt solutions, like Individual Voluntary Arrangements, can stop your creditors hassling you for money as well as reducing the amount you pay back by a significant amount. Why not get online help now or give us a call today to see how we can help with your finances?