The growth of online collateral loans
A guarantor loan is a specialized subprime product that provides competitively low rates to people with poor credit. The price is lower than other alternative financial products on the market due to the support of the “Guarantor”. This person (a family member or friend) supports the loan application in case of default. If she does, they will be responsible for clearing the arrears. The funds are issued to the sponsor as part of a security measure by the lender. If there are never any problems during the term of the loan, the person supporting the application will never have to get involved anymore.
Finding a guarantor tends to be the most problematic area in this industry! Most lenders require that you have a good credit history, a bank account and own a home in the UK. There are also typical age restrictions. Lender UK Credit has recently relaxed its demands by allowing tenants to back the application, but extra interest is added due to the higher risk of default. Whether a landlord or renter is applying, much of the focus goes to your credit score. The profile of the applicant is not a major problem, but he must not be currently bankrupt or have an IVA. CCJs and defaults should not be a problem, as many people will use these loans for debt consolidation purposes.
You can request amounts in thousands that can be divided into manageable payment periods, usually up to 5 years. The cost of online guarantor loans are low compared to their market alternatives. Using the example of GuarantorUS loans, they charge £216.21 per £1,000 for a full year. This rounds up to just 0.059% per day. Several other lenders in this sector charge amounts very close to them. The best known lender is Amigo Loans which charges £236.72. This company advertises on TV frequently, so it has become very popular despite the short time that the brand has been active.
They previously operated under the name FLM Loans, before they chose to rebrand in 2012. Their original product launched in 2005, so they’ve been around for quite some time. This industry has made rapid progress, which has been made clear by seeing many new lenders entering this niche in recent years. Market data also shows that search engine-related terms entered into Google each day have roughly doubled compared to a few years ago. Advertising for Amigo Loans would have made a difference in this regard, but all of these lenders advertise extensively on the web. This is due to the generous broker fees that can be received for the leads generated.
Broker fees are not required if you go directly to the lender, but if you do then an amount of £300 or more must be added to the balance. Avoiding such fees creates highly competitive rates. Just to highlight this, the major guarantor lenders are about 4 times cheaper than Pounds to Pocket (using the example of a sum of £1000 over the year). There was a time when guarantor lenders required paperwork to be mailed in and therefore the time before receiving the funds could be several days. A recent development has seen some lenders (such as Amigo) allow the loan process to be completed entirely online.
This means that financing can be received on the same day, which is another attractive feature of the product. It is no surprise to see that secured loans are becoming increasingly popular in the UK market. There is more supply now than ever before and it is a win-win situation for these lenders as they have the safety measure of backing to fall back on. On the other hand, with bad credit you can still be accepted here, when most major lenders would quickly reject the application. Another point is that getting involved in a deal like this can improve an applicant’s credit rating and, over time, they may qualify for the cheapest rates available at major banks.