The closest alternatives to guarantor loans include payday loans, peer-to-peer loans, logbook loans and credit union loans. Although these options do not require a guarantor, they are considered quite similar because you are able to borrow a few hundred or thousand pounds and receive funds within a few hours or days.
Our table below shows the different products available in the UK and how the costs differ from guarantor loans:
|Loan Product||Amount Borrowed||APR||Total Interest||6 months Repayment|
|Peer to Peer Loans||£1,000||12.1%||£534.00||£1,534.00|
The payday loan market is a huge £2 billion industry and includes over 50 direct lenders available in stores on the high street and online. Customers can borrow £50 up to £2,500 and receive the funds within one hour or the same day.
The average loan duration is around two weeks to 30 days so it is typically used on a short-term basis to pay for emergency purposes. The idea is that if you have an urgent expense, you can get the funds you need quickly to pay for it and then pay off the loan and interest on your next payday from work.
As you can see from the table, the Representative APR is significantly higher than other loan products. This is because in order to express the loan as an annual percentage rate, it must be compounded as though the loan lasts for an entire year – making it seem much higher. However, payday loans are only used for a few weeks and should not be used as a long-term solution to obtaining finance.
More and more lenders are offering instalments loans which can repaid over 3,6 or 12 months. The APR is usually a much better representation of the cost of borrowing because it is closely to a year. Borrower can expect instalment loans from payday lenders to be around 300%.
Applicants will always have to go through rigorous credit and affordability checks prior to approval. There is no guarantor required for this kind of loan.
For more information, visit MoneyAdviceService.org.uk
Logbook loans are a similar price to payday loans and involve the customer putting down their car, bike or van as collateral to borrow between £500 and £50,000. The higher the value of your vehicle, the more you can potentially borrow.
As it is a secured loan, if you are unable to meet your repayment after a certain period of time, your vehicle can be repossessed by the lender to pay off your debt. Any outstanding debt after the sale of your vehicle will still need to be paid to the logbook lender.
This type of loan is suited to those with bad credit who may be turned down for traditional finance from mainstream banks and lenders. But using the value of your car can allow you to get the finance you need.
You can read more about logbook loans here.
Peer to peer loans
Peer to peer lending allows borrowers to access up to £100,000 and receive an interest rate based on their credit score. Those applicants with good credit scores may pay rates as low as 3% and bad credit applicants may pay rates as high as 18%.
The way peer to peer lending works is in the name. You can borrow from a lender like Zopa or Ratesetter but they are simply acting as the middleman between you and another person. This other person is investing in the loan and receiving interest on whether or not you repay your loan.
So the investor will receive lower rates if they lend to those with good credit and higher rates if they lend to people with bad credit. The role of the peer-to-peer lender is to spread the investments evenly to ensure a low default rate and high returns for investors.
Credit unions are one of the cheapest forms of borrowing available with the Represenative APR as low as 26.80%. The APR may seem higher than other financial options but similar to payday loans, it is because the loans only last a few weeks and has been calculated as if they were 12 months long.
Credit unions are not-for-profit organisations that are created by groups of people with a common bond such as businesses, churches or charities. Their products are available by searching online or your local high street.
As non-profit seeking companies, the interest rate is very low but to be eligible, you have to be from that local area or working in the public sector such as a nurse, teacher, road worker or policeman. As the rates are so low and the companies are not quite as savvy as mainstream lenders, the application process is a bit longer and the funds may take up to 2 weeks to reach your account
If you are unable to repay your loan, there are no default fees but it may have a negative impact to your credit score.
Borrowing from family and friends
Borrowing money from your loved ones is the most common type of borrowing and the cheapest. Most families and friends will not charge you interest or give you a hard time if you fall behind on payment.
There are more websites that facilitate the borrowing between family and friends. Whether it is creating a bespoke loan online or creating a profile page for a specific cause and using a crowdfunding platform to get people to contribute, there are several options available.
Saving up money
It is always recommended to have money saved for an emergency purpose. Most financial advisors insist on having at least 3 months worth of your salary put away for a rainy day. So in the event of a broker boiler or large medical expense, you have the funds available.
The best ways to increase the interest on your savings include opening an ISA account or using peer to peer lending to get a return of up to 8%.