As part of our commitment to responsible lending and treating customers fairly, it is important the information provided by our lenders is transparent so that you compare guarantor loans effectively and make an informed decision. This guide aims to discuss the different ways that you compare rates and get a better understanding of the costs involved with a guarantor loan.
One thing to note is that there are no upfront fees with guarantor loan products. There are no broker fees like you would pay for a mortgage or secured loan products and no costs for simply applying. You only pay the interest of the loan which is determined by the lender that you choose.
We will discuss the following:
- The APR (Annual Percentage Rate)
- Representative Example
- Loan Amount and Duration
- Interest – Fixed vs Variable
- Repaying Early
Understanding The APR
The APR stands for the Annual Percentage Rate and is known worldwide as the most recognisable and easy way to compare all financial products. If credit cards, loans and mortgages are all calculated using APR, it becomes the benchmark and easy to make comparisons.
Being annual, it is calculated on the loan term and repayment lasting for a year – so is useful to compare against other annual products like mortgages but may not be as crucial for loans that just last a few weeks or months.
For guarantor loans, the APR is generally around the 39.9% to 59.9% mark and this can vary depending on the lender and product. The rates advertised are always presented as being a ‘Representative APR’ this is because is based on what is offered to at least 51% of successful applicants. The APR can vary based on several factors such as the loan duration and the credit ratings of the borrower and the guarantor. But the idea from a regulatory standpoint is that for the very least, the majority of customers will get the rate advertised.
Similarly, you may see advertising for ‘Typical APR’ which relates to the rate offered to at least 66% but this is less common for guarantor loans.
Your APR is likely to be lowest if you have a stable income, employment and a guarantor with a strong credit rating and a homeowner-status. This poses less risk to the lender and they feel confident that they will receive their loan sum and interest charged – hence the rates offered can be lower. Conversely, if the individual borrower has a bad credit rating and an average guarantor with a tenant status (known as a tenant guarantor loan), they are taking on more risk that the loan will be repaid, hence the APR could be closer to 59.9% (Source: UK Credit)
The calculation for APR is algebra and many look at the formula as being impossible. One of the simplest ways is to take the interest/loan amount x 100.
Here is an example from Buddy loans:
If you borrow a £2,500 loan over 24 months and the interest is £1,250, so the total is £3,750 to repay
£1,250/£2,500*100 = 49.9% SIMPLE!
You may notice the representative example provided underneath each lender and this is a convenient way to see how much you would be paying each month and overall if you borrowed a certain amount. For the customer, this gives them a realistic way to understand the repayment process and how much they are paying in total.
Please find an example from Amigo Loans provided below:
The Representative APR is 49.9% APR (variable) so if you borrow £4,000 over 3 years at a rate of 49.9% p.a (variable) you will repay £195.16 per month & £7,025.76 in total.
However, it is important to note that this is just an example as the amount you can borrow and how long for is determined by the quality of your application and how you respond to the various checks carried out by lenders. In addition, the rate you are charged can also vary considerably based on your credit history and the status of your guarantor – notably their credit rating and whether there are a homeowner or tenant. Once again, this is a “representative example” so is only offered to just over half of the applicants that get funded for a loan.
3. The Loan Duration – The Longer Its Open, The More You Pay
The duration of guarantor loans is based on months, ranging from 12 months to 60 months, equivalent to 1 to 5 years – although there are some lenders offer loans up to 84 months or 7 years.
In most cases, the longer the loan, the easier it will be repay as you are spreading repayments over a longer period of time and only making small repayments every month. However, you are paying more overall if your loan lasts for 3, 4 or 5 years because you are paying for the convenience of having the loan open and those small monthly repayments will continue to add up.
Taking an example from Amigo:
- Borrowing £3,000 for 36 months leads to a total repayment of £5,269.32
- Borrowing £3,000 for 48 months leads to a total repayment of £6,159.84
- Borrowing £3,000 for 60 months leads to a total repayment of £7,114.20
4. Interest Rates – Fixed vs Variable Rates
Most of the lenders we feature on our website offer their loan products based on a fixed interest rate. This is based on the idea that the interest rate charged remains constant, the same, throughout the loan process. This is different to a variable rate which might change based on economic and national interest rates. For instance, with mortgages, the interest rates can change based on market forces, including the Bank of England Base Rate.
Practically all lenders state that their loan rates are fixed through the loan term. The only lender that says it is variable is Amigo loans because their Frequently Asked Questions states that whilst it is unlikely, they may decide to change their interest rates at any point (even only marginally) and therefore the rate may become variable during your loan term.
In terms of how the fees work, similar to a mortgage, your loan is made up of interest and capital. The interest is the rate charged by the loan provider (around 0.1% per day/ equal to 39.9% to 59.9% Representative APR) and the capital is the amount of loan that you have borrowed e.g £5,000. When you are repaying your loan, each month you start off by paying most of the interest first and a little of the capital but this switches by the end of the loan term so that you have little interest and more capital. This is how mortgages account for ‘interest only’ or changes in your interest – but the same format applies for short term loans too. See example here.
5.Repaying Your Loan Early
All the lenders we work with allow you to repay your loan early and this is a something standard in accordance with the regulation of the Financial Conduct Authority.
After all, a guarantor loan can last several years and you may find that you have an injection of cash that allows to clear your account sooner than expected such as an inheritance or bonus from work. In addition, the loan is calculated on your existing job and salary and this could certainly change over 5 years to a bigger and better promotion and income.
To repay early, you can simply contact the lender directly by phone or email. Some lenders will allow you to log into the my account section of the website where you can also repay in full.
There are usually no penalties or fees for repaying your loan early, unless it is within a certain period of time. If you are looking to repay within the first few weeks or months since the loan has been funded, this would have caused the lender to make a loss, so you may expect some kind of administration or early-exit fee.
However, generally speaking, you should be able to save money by repaying your loan early. Since your loan is calculated on the basis of daily interest, the less days your loan is open for, the less you will pay. Some lenders will offer you a rebate, in which you get some kind of refund, or some will significantly reduce the amount of interest you have left to pay.
In addition, paying off your account will benefit your credit score as it shows that you have successfully repaid a lot. This information will be shared with the credit reference agencies that they work with such as Equifax, Call Credit and Experian and a positive repayment will cause your credit score to increase. It is not recommended to clear your account and then apply for a higher loan, as the lender may become suspicious of this.
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