Guarantor Loans in the UK Vs Payday Loans
Getting a loan if you have no credit history or a low credit score can prove to be a tough ask. No bank or financial institution is willing to lend money to a person who has a less than perfect credit rating. However, this does not mean that such people can’t find a loan. There are unsecured loans available that can be applied for by people who have a bad credit record or are borrowing for the first time. Payday loans and guarantor loans in the UK are two popular types of unsecured loans. Let’s analyze both of these options to find out which one among them is better.
One of the biggest differences in between a payday loan and a guarantor loan is their respective interest rates. Payday loans usually have a very high interest rate than guarantor loans. Most payday loans have an interest rate ranging from 1700% to 2000%. On the other hand, guarantor loans usually have an interest rate of around 50%. The reason for this huge difference in interest rates is that payday loans are offered for a very short period of time and don’t offer much security to the lender while the guarantor loans provide the lenders a greater amount of assurance that the loan will be paid back.
Another great difference between these two unsecured loans is the time period in which they need to be repaid. Payday loans need to be repaid within a month while the guarantor loans can be paid back in up to 5 year’s time. The lender is going to deduct the amount of the loan from your next paycheck if you have taken a payday loan. In the case of a guarantor loan, the lender is going to ask you to pay back the loan in the form of monthly repayments which are going to be due at the first of each month.
Both payday loans and guarantor loans don’t require you to have a good credit history. However, in order to be considered eligible for a payday loan, you will have to prove that you have a job. Payday loan lenders usually check with the employer to verify that you are currently working for him. The eligibility criteria for a guarantor loan are a little different. You must provide a guarantor who is willing to vouch for you and repay the loan if you default in order to secure a guarantor loan.
Consequences for Non-Repayment
Failing to repay a payday loan will result in collection of the loan amount from your bank account. If you don’t have enough money in your account to cover the loan amount then the lender will keep on collecting money from your account till the loan is repaid in full. However, if you default on a guarantor loan then the lender is going to contact your guarantor and ask him to pay back the loan as he had promised to do so when he became your guarantor.
Thus, it is clear that guarantor loans are a much better option for people with a bad credit rating than payday loans.