Borrowing money can be a complicated process. That makes it tough for people with good credit history, but is even more of a challenge for borrowers who have low credit scores, or a bad credit history.
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Guarantor loans alternatives
Part of the problem is the huge number of options out there. With so many to choose from, it can be tempting to stick with what you know. Guarantor loans have attracted a lot of attention over the last few years, so many borrowers will naturally look at these as a first option. However, guarantor loans are just the tip of the iceberg, and there are dozens of other forms of borrowing that may be available to you.
Why are guarantor loans so expensive?
A guarantor loan works like a personal loan, with one key difference: a guarantor – usually a family member – “guarantees” the loan. That means that he or she is on the hook if you fail to make your monthly payments. This can be helpful if you don’t have a good credit score: the lender takes comfort from the credit history of your guarantor.
However, there are lots of other ways to borrow money with no guarantor. With so many forms of credit, it’s never been more important to make sure that you understand all the options available to you.
Alternatives to guarantor loans in the UK
In this article, we take a balanced look at the different ways that you can borrow money. This includes some less common options, so that you can get a sense of which type of loan might be best for you.
How to borrow money without a guarantor: Taking out a personal loan
A personal loan is one of the simplest ways to borrow money. You borrow a lump sum, and pay that loan amount back over a few months or years at a fixed rate of interest.
A personal loan is also a relatively inexpensive form of borrowing. As a result, it is a good way to avoid paying high interest rates.
Personal loans are generally unsecured. This means that your assets are not at risk if you fail to make monthly repayments. However, there are serious consequences to defaulting on any form of credit, and you should never take out a loan unless you are confident that you will be able to make the monthly repayments.
The catch is that many lenders will only offer an unsecured personal loan to someone with a good credit rating. Because of this, there are strict affordability and credit checks. So, if you’re considering a guarantor loan, it’s likely that you might struggle to find someone willing to offer you a personal loan.
When deciding whether to offer you this type of product, most lenders use traditional credit checks, which only give a limited picture of how affordable a loan might be. However, innovative lenders such as Koyo are able to use Open Banking data to safely view your bank account history.
This gives a fuller, fairer picture of a loan’s affordability. Using this additional information, a lender like Koyo may be able to offer you a loan which is more competitively priced, since they are not relying on what a credit scoring agency says about you. As a result, it’s worth filling out an online application – this will give you a fast, free decision.
Personal loans are available from mainstream lenders and a host of other providers – and you don’t need to use a credit broker, since you’re generally able to apply direct to the lender. However, it may be useful to use a comparison site to quickly view a selection of available loans.
Borrow money with no guarantor: from a credit union
Credit unions are non-profit community organisations, which are run by members, for members. They can range significantly in size, but link people who share a common bond, such as working for the same employer or being a member of the same church or trade union.
In order to take out a loan from a credit union, you need to be a member, and you may also need to build up savings first. Interest payments are capped by law at 3% per month (42.6% APR), making it a relatively low cost form of borrowing.
Using an authorised overdraft
You may be able to organise an overdraft with your bank. There are two kinds of overdraft, and it’s important for you to be aware of the distinction: an arranged overdraft is one which you have agreed in advance with your bank.
An unarranged overdraft is one which has not been agreed beforehand, and banks have historically charged very high interest rates as a result. A recent piece of research from the Financial Conduct Authority found that firms were charging some borrowers effective interest rates of more than 80% a year.
If you are able to arrange an overdraft with your bank in advance, this can be a safe, cost-effective way to borrow a small amount of money.
Borrow from friends and family
If a friend or family member is in a position to lend money to you, this can be a good way for you to avoid other, high cost or risky forms of borrowing. However, it’s extremely important to consider the impact a loan might have on your relationship, particularly if you are unable to pay back the total amount you borrowed. The Money Advice Service has a great guide for what to consider if you’re thinking about borrowing from a friend or family member.
People who want to borrow a larger amount might have more luck with a homeowner loan. This product allows you to take out a loan which is secured against your property. With this product, lenders could be more willing to offer you credit, but the catch is that if you fail to make your monthly repayments, your property may be at risk.
A logbook loan is a form of secured loan, where you borrow against the value of your vehicle – usually a car. It’s another form of lending which can be useful for borrowers with bad credit history, but of course you’re putting your vehicle at risk. This can be especially problematic if you use your vehicle to get to and from work. You’ll have to provide details of the car when filling out the application form.
Logbook loans are extremely expensive (typically 400% or higher) making this a very high-cost form of credit.
‘Bad credit’ card
There are actually a number of credit cards designed specifically for people with a bad credit history. If used properly, they will work as a straightforward way to borrow money and help you to build up a good credit score.
There are two catches though: firstly, “bad credit” cards charge a higher rate of interest than you’d pay on a standard credit card. That can be manageable in the short term, but over a longer period, monthly payments really add up. So, if you need to borrow for more than a few months, a personal loan is probably a better option. And of course, if you fail to make payments on a “bad credit” card – or indeed any form of borrowing – you risk doing further damage to your credit history. As always, it’s important to check the affordability of a loan if you’re worried about high interest rates.
This is another form of borrowing available to people with poor credit history or serious money problems. Payday loans are generally short term loans (repayable in weeks or months, rather than years) which carry a high cost. The Financial Conduct Authority defines payday loans as having a representative APR (annual percentage rate) of 100% or more, but rates can be much higher, and you’re likely to be penalised for late repayments. As always, consider the affordability of a payday loan, and always check a representative example.
A budgeting loan is designed as a way for people on a low income to spread the cost of an unexpected or essential expense. They are only available to people receiving certain forms of benefits (you can check your eligibility here) and strict limits apply. They’re interest free, and loan repayments are usually taken out of your benefits without you having to do anything. If you’re eligible, a budgeting loan can be a safe, low-cost option.
Salary advance schemes
There are two ways you may be able to receive a portion of your salary early. The first is by going direct to your employer and asking for an advance on your wages. This can be a cost-effective option, but different employers will have different approaches for handling these requests.
There are also several third parties which offer salary advances, usually for a fee. As well as being more expensive, these schemes are not regulated in the same way as other forms of credit, and the FCA has flagged concerns about the difficulty of working out the true cost of an advance.
How do the different options compare?
Note that the cost for most borrowing products will depend on your individual circumstances, but this chart will give you a rough idea of how much a typical borrower might pay for each product.
What’s a good alternative to a guarantor loan?
In order to choose the right option, you’ll need to think about your own circumstances. We started Koyo on the principle that you should be treated fairly when it comes to credit, and we want to make it straightforward for people to see whether a personal loan could be a good option for them.
So, you can apply quickly and easily at koyoloans.com to see if a personal loan is suitable for you. The application process takes just 3 minutes, and won’t affect your credit score.
Now that you’ve read our article on some alternatives to a guarantor loan, you might want to take a look at some of the options available to you. Our loan calculator is a great place to start.