This isn’t right – these articles are ignoring the big problems with guarantor loans and the fact that there are much better alternatives. Guarantor loans such as Amigo are expensive and dangerous.
A common problem
The case in the first 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?
It’s 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 representative APR of 50% (actually it’s 49.9% but that is really 50%, isn’t it…) the repayments would be £146 a month and she would end up paying £2,269 in interest over the three years.
Compare that to a reasonable rate for the same unsecured loan. MoneySavingExpert quotes 5.2% for £3,000 over 3 years as the best rate on offer, but how about just a reasonable rate, 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
Of course Amy can’t get a good loan offer. But her partner may be able to get a reasonable loan offer, a great loan offer, get 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.
Paying off a defaulted loan doesn’t actually improve your credit rating (if you think that sounds odd, it is explained in Paying a defaulted account and your credit score.) what matters is getting new credit which you handle well. This doesn’t have to be a large, bad credit loan such as from Amigio. A much safer option for her 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), 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 it would feel awkward borrowing from your partner when you haven’t known them that long.
These are all good points – but they 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.
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.