Guarantor loans are not, in any way, a new phenomenon. Even in their current format, lenders have been offering these products for over 10 years. The original lenders, including FLM (now Amigo) started a consumer education program and to a large extent opened the eyes of many other commercial lenders to the opportunity to make a good return on their investment.
Currently there are more than a dozen guarantor offerings, with that number increasing ever more. The new entrants are mainly companies that already have (or had) a place in the lending market and have just diversified their offering.
Whilst the market is constantly evolving, some of the early practices really focused on the quality of the guarantor, with scant regard being paid to the applicant. The premise of this was that ultimately, the Guarantor would be the one required to pay back the loan.
This approach, whilst clearly flawed has allowed access to credit for a section of the public that otherwise would be unserved, or possibly ‘looked after’ by the Payday sector. In the UK credit culture, this access to credit is highly regarded by consumers, even if it does come with a stigma attached. The stigma of course being the requirement to talk to someone else about the fact that you need to borrow money.
The increasing consumer awareness has though reduced some of that stigma with it being almost inconceivable that any potential guarantor not having seen (many) adverts from the main providers.
As with all growing markets, it soon becomes important for lenders to start hitting their respective lending targets and this typically happens through differentiation. Most are obvious, some less so and not all are communicated well to customers.
Common areas of differentiation include the basics such as price (APR), max loan amount or loan term. Typically these can work in the customers favour as it gives them the opportunity to find the most suitable deal for them. Variations go from maximum loan amounts from £5,000 to £12,000, APRs vary from 29.9% to 99.9% and maximum loan terms vary from 3 to 7 years.
The massive recent growth in the marketplace does not play well for the consumer in all aspects though and it is in the ability to shop around that some of the potential customer detriment comes to the fore. There is now so much choice in the market, but typically the only factors highlighted to consumers are those primary ones around the actual loan. Very little time or effort is spent on talking about the process, the guarantor requirements or how the loan will operate once the money is granted. These are key considerations that could potentially have a significant impact. For example, the variances in the three areas identified are:
- Process – at one end of the spectrum full documentation (payslip, bank statement, ID) etc is required for both the applicant and the guarantor. At the other end, some lenders are doing this completely electronically. This could make a significant difference to the speed of payout, or the amount of wok required.
- Guarantor Requirements – Many lenders require your guarantor to be a home owner with a good credit rating and a stable income. At the other end of the list, some lenders will accept tenant guarantors, or individuals with less than perfect credit
- Process – Some lenders still effectively lend to the guarantor and as such contact them as soon as there is an issue with payment. This can include making the guarantor pay immediately through to registering defaults and ultimately CCJS. Other lenders will allow up to three months for the customer to make their repayment before contacting the guarantor.
These distinctions can make a significant difference to the end product the customer gets and therefore shopping around becomes even more important, yet in a world where the ‘now’ culture is ever more prevalent it is less common for people to do that.
This leads to using a broker, someone who knows what the differences are, who knows what is and isn’t acceptable to each lender, who can save you significant time and ultimately come out with the best deal for your circumstances. If you want to discuss, please contact one of our team.
For more information on guarantor loan please see our guarantor loan section.