There is a distinct difference between guarantor loans and payday loans, the obvious one being that guarantor loans require a credible guarantor, a person who financially vouches for whoever is taking out the loan. Payday loans, on the other hand, are secured on the borrower’s next income payment. Although both are forms of short-term loans, other variations also apply.
The key differences between a guarantor loan and a payday loan are as follows:
- Eligibility for a guarantor loan is not based on the credit worthiness of the borrower, but on the financial security of the guarantor vouching for the borrower.
- A credible guarantor stands as security for the long or short-term loan.
- The guarantor must usually be aged 23 or over and be a homeowner.
- Loan amounts vary, depending on the duration approved.
- Loan duration may vary over several months.
- Guarantor loans may be for a range of purposes, including personal, educational or business.
- Market interest rates usually apply.
- Guarantor loans tend to be used by borrowers with poor credit history.
- Application timeframe is based on receipt of guarantor details and signature.
- Payouts may be made within 24 hours.
- Long or short-term lending criteria apply.
- Eligibility for a payday loan may be based on income security and credit worthiness.
- Payday loans are secured by the borrower’s next income payment.
- Payday loans are available to people aged 18 plus and home ownership is not a requirement.
- Loan amounts range from £100 to £1,000.
- Payday loans are cash advances to meet expenses or emergencies.
- Payday loans are used by borrowers attempting to preserve their credit history.
- Fees are not based on market lending interest rates, but on overdraft and late payment fee charges.
- Loan duration is usually one month, unless extended at an additional cost.
- Applications may be approved online with payouts within 30 minutes.
Comparing a guarantor loan with a payday loan
How an individual benefits from a guarantor or payday loan depends on their borrowing needs and existing financial circumstances. With a credit worthy guarantor, interest rates may be more favourable than payday loan fees for a similar short-term loan.
Borrowers taking out a guarantor loan or a payday loan are both under an obligation to meet their debt payments on time. If a payday loan borrower defaults, additional charges may be added, incurring higher borrowing costs. With guarantor loans, if a borrower defaults, the debt payment may be claimed from the guarantor.
The guarantor loan provides more flexibility in terms of amount, duration, interest rate and monthly repayment amount. Each lender has different lending criteria for each loan type. Comparing what lenders offer may provide cost-savings in the long run.
Whether looking for long or short-term loans, aspects to consider include the purpose of the loan; the amount required; payout timing required; potential repayment duration; affordability of loan repayments and likelihood of loan approval. Seeking professional advice will help the individual concerned select the most suitable loan for their requirements.