Guarantor Loans vs Payday Loans

Guarantor loans and payday loans are considered two of most effective ways to borrow unsecured finance for short-term purposes. But with the two products having quite different terms, criteria and costs, our guide explains the main differenced between the two.

A guarantor loan allows you to borrow up to £15,000 in one lump sum with the help of a guarantor, a person you know such as a family member or friend who is willing to be part of the loan agreement and cover the cost of your loan if you cannot. You must have a guarantor as part of the application to be eligible and have their full consent. Guarantor loans can last between 1 and 5 years and customers repay in equal monthly instalments.

A payday loan involves borrowing between £50 and £1,000 and the idea is that it covers an immediate financial expense and then you repay the loan and interest on your next payday, which is the day you get paid from work. There is no guarantor required as part of the application and with the average loan lasting around two to four weeks; the loan can be settled in one repayment.


 Guarantor LoansPayday Loans
Loan Amount£100-£15,000£50-£1,000
Loan Term1-5 yearsUp to 45 days
Guarantor RequiredYesNo
Representative APR49.90%1270%
Same Day TransferYesYes or 48 hours
Paid in one lump sumYesYes

The criteria 

Both payday loan and guarantor lenders in the UK require borrowers to be UK residents, over 18 years of age and in employment earning at least £500 per month.

Applicants will be assessed on their credit scores, which shows how well they have repaid other forms of credit in the past and shows any outstanding debts. Whilst successful payday applicants are expected to have moderate to good credit scores, for guarantor loan borrowers this is not always the case.

Guarantor lenders are willing to accept customers that have poor credit, however, they must have a guarantor part of the agreement that has a good credit history – because this provides a level of security that the lender will be able to recuperate their funds.

Applicants for both types of loan will have to prove their employment status through the use of a pay-slip or bank statement and pass affordability measures which assess your income and expenses to determine how much you can afford to borrow and repay without falling into debt.

Reasons for taking out a loan 

Payday loans are commonly used for emergency purposes to cover a shortfall of cash. For unexpected emergencies like broken boilers, medical bills and car repairs, the loan is supposed to help you pay for the immediate expense and then by the time you get your pay cheque at the end of the month, you can pay off the loan and be back on your feet.

For guarantor loans, they are also used for emergency reasons but since the loan amount is higher and lasts for longer, it gives customers more flexibility – so they don’t just have to be for emergencies but also weddings, cars or home improvements.

Furthermore, customers with bad credit use guarantor loans to improve their credit rating. Since they might get turned down for mainstream finance, they can get the loan they need with the addition of a guarantor and by repaying their loan on time, their credit file will be updated and improved accordingly.

The cost of a loan 

As per the table above, the representative APR for payday loans looks significantly higher than standard financial products at around 1,200%. The reason that it runs in the hundreds or thousands of percent is because the loan, which only lasts a few weeks, is reflected as an annual percentage rate and therefore it is multiplied several times.

The ‘representative’ figures means that this is the rate that at least 51% of successful applicants will receive and this may vary due to length of the loan or a customer’s credit rating. The true cost of a payday loan is around 0.8% per day or £124 per £100 which is the maximum that can be charged as per recent regulation enforced by the Financial Conduct Authority. (Source: MoneyAdviceService)

If you compare guarantor loans on our website, you will see that the representative APR is typically between 48.9% and 304% and may be fixed or variable depending on the lender. The APR is considerably less than a payday loan but it also reflects that guarantor loans are taken out on an annual basis. The average daily interest is around 0.1% which is certainly less than a payday loan.

To reduce the cost of either loan, you can contact the lender to repay early. Some lenders will say there are a minimum number of days that you need the loan open for which could be a few days with a payday loan or few months with a guarantor loan. However, generally you should be able to repay early without any additional fees and because the loans are charged on a daily basis, the less you have the loan open for, the less you will pay.

How long it takes to get funds  

Payday loans are usually transferred to the customer’s debit account within 24 hours, with some lenders offering instant or one hour funding once all the checks have been approved. The quick funding process is ideal for those looking for emergency cash.

Guarantor lenders take a little longer to complete the loan because they require information from both the borrower and the guarantor and the transfer typically takes longer than payday loans – hence the average funding time is 1 to 3 days.

Funds will typically be sent to the guarantor first who can decide to pass on the monies to the main borrower or send it back to the lender if they change their mind and no longer want to be involved in the transaction.

Alternatives for borrowing short-term finance 

Although payday and guarantor loan products are fast ways to borrow money, there are indeed other low cost alternatives including borrowing from family and friends, zero percent credit cards or credit union loans. For more information, visit our list of alternatives to guarantor loans.