Are ‘Guarantor Loans’ bridging the gap?

If someone said to you that they were applying for or indeed already had a ‘guarantor’ loan, what exactly would spring to mind? They cannot afford a ‘real’ loan; they must have really bad credit? It’s just another term for a payday loan? Whatever you may think, the guarantor loans sector is now the fastest growing in consumer borrowing, so why is this?

A guarantor loan is still an unsecured loan in that there is no property, as in a mortgage, or goods for the monies to be borrowed against, such as a car loan. So they are still considered higher risk to lenders. The risk to a lender is assessed using credit scoring which can be obtained via your credit report. Generally the higher your score, the less risky you are. There is an opportunity to repair or improve any poor credit scores by showing that you can make repayments on time.

However, thousands of people fall into the poor or bad credit category as they simply don’t score enough points, so what are the options for them? The High street banks and more traditional lenders will not generally borrow to anyone with less than perfect credit. Previously you could have argued that it was payday loans that helped bridge this gap, but with increased and much needed Financial Conduct Authority (FCA) regulation payday loans are not the long term answers.

So that brings us to the guarantor loans industry. A guarantor loan is an unsecured loan that requires the borrower to have a second person acting as a guarantor, so should the borrower fall into financial difficulty, the guarantor can pay. The UK market consists of around 15 lenders, fully FCA licensed and compliant, and furthermore a few key players have been in the industry for several years and have a trustworthy reputation and a transparent way of doing business. Bournemouth based Amigo loans are perhaps the best known. Initially known as the Richmond Group established in 1999 its founder James Benamor started the company with a view to arranging loans for those “excluded by mainstream lenders”. Mr Benamor added: “I’ve spent over 10 years building Amigo and today I’m proud to see a thriving, responsible, honest company which has helped nearly 200,000 customers improve their lives by providing good old-fashioned, honest and responsible finance.”

sible, honest company which has helped nearly 200,000 customers improve their lives by providing good old-fashioned, honest and responsible finance.”

Another popular lender is UK Credit, with the growth and expansion of guarantor loans they have grown steadily since 2010. Although they have expanded considerably in the last seven years they have not changed their core values which have been key to their success. UK Credit is, and will continue to be a lender which retains its flexible, energetic, and smart approach to lending, without compromising on their ethos of being a responsible lender which treats its customers fairly.

The TFS Group was established in 2003 to offer a range of consumer finance products for borrowers who are unable to access the high street banks. The TFS mission statement says it all in that in aims to “strive to be responsible providers of finance on reasonable and transparent terms to customers and businesses requiring an alternative to the mainstream funders in the UK. By making customer service, satisfaction and product innovation our primary focus we will ensure we meet our shareholders aims and objectives and those of the regulator”.

In 2013, the guarantor industry was said to be worth around £153 million, with 53,000 loans taken out, whereas the payday industry stood at a huge £2.5billion with 10million loans executed. However, today the guarantor loans industry is worth a staggering £430 million, whereas the payday has diminished ten-fold to £220 million.

So it is clear that the demise of payday loans has had a positive impact upon the guarantor loans industry. The tightening of legislation has ‘cleaned up’ a payday industry that was fundamentally unfair to its customers. However, the guarantor industry has learnt from paydays mistakes, and working alongside the FCA they are compliant, transparent and fair. They also offer a financial product that is much in demand, offering unsecured loans over a 1-7 year period up to a maximum of £15,000. You couldn’t get this from a payday lender. Guarantor loans are not a new concept; it is how banks used to lend before computer credit scoring took over and is a trust-based system.

Although some may argue that the rates are too high, most high profile being Martin Lewis founder of Money Saving Expert who tweeted James Benamor directly posting;

“Feel slightly sick having just seen an Amigo loans ad saying ‘unlike others’ we’re affordable, at a long term 49.9 per cent APR. Things need 2 change.”

Mr Benamor defended Amigo Loans by responding: “Amigo is flexible; no charges only daily interest so can be used exactly as a payday loan, but around 100th of the APR”

The APR that a person with bad or poor credit may be charged does depend on a person’s individual financial circumstances and ranges from 39.9% to 59.9%. So yes, not the lowest rates available for an unsecured loan, but significantly lower than a payday APR, significantly more professional, transparent and perhaps more importantly heavily regulated and compliant.

Indeed the overall rise in popularity of alternative lenders has been fuelled by a consumer revolt in dissatisfaction about the so called ‘big’ high street banks. It was alleged by the Consumers Association that as many as 7 out of 10 customers are being ripped off, and urged customers to have the courage to shop around with banking. The watchdog hopes to start a ‘revolution’ that will force banks to provide a better service and better value or else lose customers.

The bad press for the big four banks consists of bad deals and fees on current and savings accounts, excessive high charges on mortgages and unnecessary fees associated with credit cards, unsecured loans and overdrafts. Barclays, HSBC, Lloyds TSB and RBS have all been posting record profits, helped by high charges and extremely poor interest rates. There have also been public campaigns against the banks highlighting mortgage rip-offs, and overcharging on gas and electricity and genetically modified food. All of us are aware of the disgraceful PPI scheme that was sanctioned by the banks.

So, yes alternative lenders may charge a higher rate of interest, and yes you may have to ask another person to be your guarantor, but these lenders are so closely regulated that they are completely transparent. They provide a service for those in society that are unable to access mainstream credit, but by using their service you can help rebuild it back up. The mainstream lenders are just simply not interested, and to be honest given the amount of controversy that surrounds their practice, one could argue that they are no better than the much berated payday lenders.