A new loan company, Glo (which stands for guarantor loan option), has launched a loan aimed at people who don't have a perfect credit history themselves but have credit-worthy family or friends.
The loan on offer is known as a guarantor loan. As the name suggests, borrowers will need a guarantor who will be legally responsible for the loan if the main borrower defaults on payments.
What interest rates do they charge?
Glo offers an APR of 49.5%. That's significantly higher than personal loans available on the high street, but still considerably lower than payday lenders, which charge APRs of 4,000 to 5,000%.
Glo offers loans of up to £7,000 over one to five years. Its website includes a slide tool that tells you how much you’ll need to repay each month, and in total, for loans of various sizes and durations.
For example, if you borrowed £3,500 for three years you’d pay £170.41 a month and repay a total of £6,134.76. A £7,000 loan over five years would cost £276.15 a month and a total of £16,569.
To put that into context, borrowers with a good credit rating could borrow £3,500 over three years at a rate of just 5.8% from peer-to-peer lender Lending Works. This would mean monthly repayments of £105.38 and a total cost of £3,793.68 almost £2,500 cheaper. As for a £7,000 loan over five years, borrowers could get a rate of just 3.9% from Zopa. That would equate to monthly repayments of £128.38 and a total bill of £7,702.80 -– less than half the Glo loan.
Who can apply?
Having a good credit score isn’t necessary for a Glo loan – that’s what the guarantor is for – but the borrower can’t be bankrupt, have an individual voluntary arrangement (IVA), or Trust Deed (in Scotland).
The applicant does still need to demonstrate they can afford the repayments though.
But while Glo borrowers don’t need a decent credit score, their guarantor will need one. Aged between 18 and 70, the guarantor can be a relative or friend but needs to be “financially independent” from the borrower. That means there can't be any joint financial agreements.
However, unlike some other guarantor loans, the guarantor doesn’t need to be a homeowner.
Crucially the guarantor needs to be willing to take responsibility for loan repayments if the borrower fails to pay.
How is Glo different?
Glo claims that before confirming any loan agreement, it will speak with the borrower to ensure they can afford the repayments and they fully understand their commitment.
A similar conversation takes place with the guarantor to make sure they would be willing and able to make repayments should they be called upon to do so.
Glo says that, unlike other lenders in the guarantor sector, if the borrower has a problem Glo will work with them to find a solution rather than going straight to the guarantor to demand payment.
Who’s behind Glo?
Glo is the latest offering from Bradford-based Provident Personal Credit Limited, part of the Provident Financial Group.
The company’s been going for more than 130 years and typically lends to non-standard credit customers. Other products offered by Provident include cash loans with repayments collected by agents who come to your home, sub-prime credit cards, and Satsuma Loans which offers high interest loans over three to six months.
Should you take out a guarantor loan?
Guarantor loans cost far more than mainstream loans. They’re targeted at people with either a poor or non-existent credit history or issues with late payments who can’t access mainstream credit.
There are some circumstances where this kind of loan could be a decent idea – for example, to buy a car to get to a new job, grow a business or pay for a training course. However, it’s not a good idea to take out a guarantor loan for more frivolous activities such as holidays or nights out. You should only take one out if they are absolutely necessary.
One good thing about guarantor loans is that payments are fed back to the borrower’s credit report and could help them get cheaper credit in the future.
What are the alternatives?
While Glo’s main competition in the guarantor market is Amigo Loans, which offers borrowing of up to £5,000 over periods between one and five years with a representative APR of 49.9%, there are companies offering cheaper APRs. Duo advertises a representative APR of 39.9%, while Hero Loans is pegged at 44.9% and GuarantorUs at 45%.
If you have a good track record yourself and desperately wanted to help out a friend with a bad credit score then there are cheaper ways to do it than guarantor loans. You could simply lend the money to your friend or relative yourself – if you can afford to.
However you’d need to be sure they’d be willing and able to repay the cash and accept the possibility that the relationship could become tricky if they fail to do so.