I was surprised to read a newspaper article saying that Amigo loans were a good way to repair a bad credit score.
This isn’t right – there are big problems with guarantor loans – they are very expensive and dangerous. And there are much better ways to improve a bad credit rating!
Amigo is much the biggest guarantor lender in Britain, but everything here also applies to other guarantor loans, eg from Bamboo, Buddy Loans, George Banco etc.
If you already have a guarantor loan, or you are the guarantor for someone else’s loan, see the bottom of this article where I look at what your options are.
A common problem
The case in that article sounds like a situation that occurs quite often – Amy was managing her debts then things went wrong for her and she first got missed payments then defaults on her credit file. But her life moved on and, with a new partner and a new job, Amy wants to repay the debts and improve her credit record.
A consolidation loan can seem the obvious answer – cheaper than credit card interest, one simple payment to make – but it’s hard to get a large consolidation loan, and impossible with a bad credit record.
The suggested way forward was to take out a guarantor loan with Amigo, use it to settle the debts with defaults and repay it. The loan would be guaranteed by Amy’s new partner so her bad credit record wouldn’t matter.
So why isn’t this a good idea?
Amigo loans are incredibly expensive!
Say Amy borrowed £3,000 over three years from Amigo to pay off a couple of catalogues and a small credit card debt. Using Amigo’s typical APR of 50%, the repayments would be £146 a month and she would end up repaying £5,269 over three years – that’s £2,269 in interest.
Compare that to a reasonable rate for the same unsecured loan. In January 2018, MoneySavingExpert quotes 5.3% for £3,000 over 3 years as the best rate on offer, but those top rates are hard to get.
So consider an OK rate, not one of the best ones. Say 12%. There the monthly repayment would be £99 and the total interest paid would be £556. A huge difference!
Amy can’t get a good rate loan – but her partner can
Amy can’t get a good loan offer. But her partner may be able to get an OK loan offer – or with a better credit record he could get a really good one or even a 0% credit card deal… or he may even have savings. If he pays off her debts, she can then repay him at a much more reasonable rate of interest. Everyone wins.
This won’t improve Amy’s credit score, but there are better – cheaper and safer – ways to do this. A much safer option for Amy is to get a “bad credit” card and uses this for something small and repay it in full every month so she doesn’t pay any interest at all, this will get some positive marks on her credit record and her score will improve.
So she gets all the credit building benefits of a guarantor loan at a fraction of the price.
What if she doesn’t want to borrow from her partner?
If you are looking at a guarantor loan, you may think it sounds better than borrowing the money from the person who would be your guarantor:
- perhaps you don’t think your mum could afford a loan on her pension, but she could be a guarantor because she has a house;
- perhaps your friend is planning to get a mortgage and wouldn’t want to take out a loan;
- perhaps Amy doesn’t want to borrow from her partner because they haven’t been together that long.
But those are all also excellent reasons why that person should NOT act as a guarantor for your loan.
You should never ask someone to guarantee a loan if they can’t easily afford the repayments.
Guarantor loans are expensive – you may find yourself struggling to make the repayments after a while. and then lenders like Amigo are very quick to chase your guarantor instead.
If things go badly wrong for your finances – you could lose your job, have your hours cut, have a baby, become ill etc – there are options such as Debt Management Plans that can help with most debts. But these can’t help with guarantor loans. You can’t make an arrangement to pay less to a guarantor loan for a few months because the lender will just go after your guarantor.
So what should you do?
Ask yourself if your possible guarantor is well off with spare money every month?
- Yes – then talk to them about how they could help you repay your debts and you could then repay them. This will save you a LOT of money.
- No – then you shouldn’t ask them to be a guarantor. It’s too dangerous for them. Don’t take the risk that your credit rating problem could become someone else’s debt nightmare, it’s not fair.
If you already have a loan from Amigo
In this case, you probably already know that it was a huge mistake! So what can you do about it?
Well first if your guarantor couldn’t manage to repay your loan if you can’t (and by “repay” I mean from their income, not by selling their house!), they can complain to Amigo and ask to be removed as a guarantor. That would be a great weight off your mind. It would turn this guarantor loan into a “normal” loan and you could pay it off as part of a debt management plan.
You too can make an affordability complaint if the monthly payments on your loan are so high that you are having to borrow more or get behind with your bills every month. See Ask for a refund from a guarantor loan . If you win this, the interest will be removed so you only have to repay what you borrowed, and this can be at an affordable rate.