As one of the UKs foremost providers of Guarantor Loans we are sometimes asked by our applicants’ guarantors why the interest rates on them are higher than the guarantor could get themselves on the high street. So we thought it would be a good idea to explore the relationship between credit histories and interest rates so our readers can better understand guarantor loan interest rates.
The Guarantor Product
As you probably know, a guarantor loan is one in which a borrower’s application is supported by somebody that knows them who acts as a Guarantor. The Guarantor pledges to the lender that if the borrower fails to make the loan repayments then the lender can ask the Guarantor to step in and make the repayments on the borrower’s behalf. The contract between the Lender and the Guarantor is as binding as between the Lender and the Borrower.
Guarantor Loans Interest Rate
The idea behind the product is to allow people with less than perfect credit histories to access credit at a rate lower than they would normally be offered. This is an important point and one that bears a little more explanation. Interest Rate (or APR in its annualised version) is effectively the pricing mechanism of the loan market – the higher the perceived risk to a lender, the higher the price or interest rate.
The debate around an absolute cap on interest rates has been covered extensively in other pages and is too broad a topic to cover sufficiently here so let’s stick to Guarantor Loans and their place in the market. A CAB report noted the average APR for guarantor loans as 46.3% (although actually they can be higher than this) which to many of us may seem high, but let’s just put that into the context of the market.
For those with perfect credit histories a personal loan from a high street bank with an APR of around 10% to 15% may be the norm. For borrowers with less than perfect credit histories the range of APRs on offer currently ranges from 15% to over 1,200% (it took 2 minutes on Google to find one at 1,291% APR). Borrowers with poor credit histories are often faced with a stark choice if they want to borrow money – pay a rate as high as 1,000% if they borrow on their own or apply with a Guarantor and access credit at a fraction of the rate. In this context, guarantor loan interest rates of 46% APR is certainly at the lower end of the scale and is in fact lower than many standard, unsecured loan products available.