Introduction

Using a friend or family member as back up when borrowing money is a principle that’s been around for a very long time. Yet it wasn’t until early 2005 that guarantor loans were introduced to the subprime loan market.

Their place in the market

Guarantor loans are designed to fill the gap between the strict criteria banks, building societies and supermarkets and the high interest doorstep or payday lenders, and although they have grown in popularity over the past few years, it seems that many are still unaware of their presence in the market.

The awareness

According to a recent survey, only 37% of Brits are aware of guarantor loans as an alternative lending option, whereas 72% are aware of payday loans. This statistic may explain why so many are turning to these short term loans when they’ve been declined by their bank. However, it should be forgotten that payday loans are designed to be a short term fix to your financial problems; not a long term solution. Using payday loans for a purpose other than tiding you over could drop you into further financial problems.

The rates

Guarantor loans on the other hand are a much more long term solution; you can borrow up to £5000 over a term of up to 5 years. Many choose guarantor loans when looking to consolidate debt, purchase a new car, fund a holiday or make home improvements. The rates will be higher than the equivalent bank loan however they are considerably cheaper than other subprime options such as payday loans, logbook loans or instalment loans.

The support of the guarantor

One of the reasons guarantor lenders are able to offer their products at reasonable rates is because of the support of the guarantor. It is the guarantor’s responsibility to guarantee to pay the month instalment if the borrower ever fails to do so. The typical guarantor criterion is as follows:

• They must be a homeowner;
• They must have a good credit history;
• They must be in receipt of a regular income;
• They must be between the age of 25 and 72.

Anyone can stand as guarantor providing they are not financially associated with the applicant (i.e. a partner or spouse). Many choose to use their friends, close family members or work colleagues as guarantors.

The trust

It doesn’t really matter who you choose as your guarantor it is the trust between the two of you that is crucial. You firstly need to have a mutual understanding of each other’s financial situations; if you have credit card debt – you need to tell your guarantor about it, if you lose your job – your guarantor needs to know about this. Leaving your guarantor in the dark regarding your money could put both your finances and friendship in jeopardy.

Although you have the support of the guarantor, your attitude as the applicant should be to pay every instalment on time. The guarantor should only ever be used when all other options have been exhausted.

Conclusion

Although the awareness of guarantor loans is slowly increasing, they are yet to establish themselves fully in the unsecured loan market. In answer to the initial question; are guarantor loans the future of subprime lending? As a product there is certainly a place for them in the market; the rates are attractive in comparison to alternatives and the lending criteria means that they are available to those who may have struggled with credit commitments in the past. Only time will tell, however the early signs are bright.