Wondering whether you should apply for a payday loan or for a guarantor loan? They’re two very different types of loan and, in this article, we’ll share with you:
- what a payday loan is
- what a guarantor loan is
- why we don’t link guarantor loans.
What is a payday loan?
A payday loan is a loan you take out which has one repayment date. So, on that date, you pay back what you borrowed plus the interest on top of it.
Payday loans are designed for people who need money in a hurry to cover an unexpected bill – borrowers often receive their money within an hour of making an application. There are plenty of places where you can apply for payday loans online, including payday loans online for bad credit applicants.
Payday loans tend to be for between £100 and £1,500. Unlike most types of credit, payday loans are heavily regulated by the Financial Conduct Authority. Only licensed lenders may offer a payday loan either direct or through a broker like Oyster Loan.
Each payday loan offers the following legally-backed guarantees for borrowers:
- You won’t be charged more than 80 pence per day for every 100 pounds that you borrow,
- You won’t be charged more than £15 if your lender can’t collect the repayment from your bank account and they may only make two attempts to collect the money, the second of which will not attract another fee, and
- You won’t pay more in interest and fees than you borrowed in the first place. So, if you borrow £500, you’ll never be charged more than £500 in interest and fees
When you apply for a payday loan, your name is on the application form. Each lender will decide whether they’ll let you borrow money from them based on the details you provide them with and what’s on your credit score. Most payday lenders are happy to work with people who have less than perfect credit scores – they realise that, from time to time, life gets complicated. They make a judgement based upon you and your financial circumstances today, not how things were for you a few years ago.
Better still, when you pay the loan back, your credit score can actually improve.
What is a guarantor loan?
Guarantor loans are very different from payday loans. Whereas a payday loan is made based upon you and your personal circumstances, a guarantor loan requires you to persuade someone – a friend, family member, or colleague – to pay your loan off for you if, for whatever reason, you can’t make the repayments yourself.
Guarantor loans are many longer-term loans than payday loans – they generally allow you to pay your loan back over a period of between six months and five years.
You may also borrow much larger amounts with a guarantor loan than with a payday loan. You can apply for loans between £1,000 and £15,000 (sometimes higher) with a guarantor loan.
Why don’t we like guarantor loans here at Oyster Loan?
On the face of it, guarantor loans sound reasonable. However, the team at Oyster Loan don’t like them so we don’t offer them. But what is it exactly that we don’t like about them?
First, unlike with payday loans, there are no additional Financial Conduct Authority guarantees that cap what borrowers pay in interest and in fees.
Second, it’s a lot to ask someone to stand ready to pay your loan off for you if you can’t. Who would you nominate? Would it be a friend, a family member, or a colleague at work? It would have to be someone who trusts you and someone you trust. Your guarantor has to have a very good credit rating but, if you fail to make the repayments in full and on time, your guarantor is going to be seriously out of pocket. What if paying your loan backstops them from buying a new car when they need one or taking their family on holiday?
We all know that worrying about money is awful – no-one likes to be in that situation. However, and please believe us when we say this, no amount of money is worth it if you lose the respect and love of your friends and family. There’s a very real risk of significant damage to your personal life if your guarantor has to pay the loan off for you – and the damage could be even worse if they can’t pay because they themselves have fallen on hard times and your guarantor company drags them into court.
Third, unlike with payday loans, there aren’t strict guidelines on how lenders work with borrowers who fall behind on their loans. On payday loans (and some short term loans), payday loan borrowers have many more rights than people who borrow using a guarantor. The Money Advice Service has a great article on the rights you have when you have problems paying back a payday loan.
Fourth, the cost of guarantor loans. 29% to 69% APR over 5 years – even though the loan is backed by a guarantor with a fantastic credit rating. It would be much cheaper for your guarantor to take a loan out themselves and lend you the money – you’d save £1,000s. You’d be hard pressed to use a guarantor loan to consolidate any other debts you have because of the interest rate.
For us, the sums don’t stack up. If you need between £1,000 and £15,000, apply direct to a lender and, if you’re approved, you may very well end up paying less than with a guarantor loan and you wouldn’t be putting your loved ones at financial risk.
Give yourself some credit – apply for a payday loan
If you need a payday loan to meet an unexpected bill, apply through Oyster Loan. We’re a broker and not a lender. What we do is find the very best and cheapest deal on the market from our panel of FCA-licensed reputable and established lenders.