Are guarantor loans reliable or shady business?

Question

One of the hard things about living in the UK and being an immigrant is paying rent 6 months upfront (of course, unless you have a guarantor... which is usually parents who are not in the UK).

My friend told me that he took a guarantor loan to solve it, sounds reasonable, 1 month rent as a fee in exchange of not having to pay £3000-5000 upfront.

But personally, based on the web sites, it feels a bit shady, don't know why. I guess I am just really careful with legal things involving loaning money.

So my question is, are those services fine to use after finding some reasonable company and talking to one or two of their customers and asking a lawyer to check the contract for some not straightforward clauses, etc?

Thanks!

Answer 1

Lots of loans that are shady to say the least are advertised currently on TV in the UK. I'm happily in a situation where I don't need a loan but might be asked to be a guarantor. If anyone asked me to be a guarantor for a loan, I'd either be capable and willing to loan that money to the person myself, or I wouldn't guarantee. I'd never, ever in a million years be a guarantor.

There is one company in particular offering loans "the good old-fashioned way" asking for 49.9% interest with a guarantor. That is an interest rate that can bankrupt the guarantor. If you take the loan with me as the guarantor, and you decide that you are not interested in paying back the loan, I'm stuck with this loan. So since the guarantor must trust you, if he or she is established in the UK, the best thing to do would be for them to take a loan from a bank (or any supermarket nowadays will give you a loan at a decent rate) in their own name, give the money to you, and hope that you pay back the money. I'm equally responsible for repayment whether I'm guarantor or whether the loan is in my name, so I'd get that loan at a decent rate from a reputable bank.

Answer 2

gnasher729's answer is fundamentally correct and deserves the checkmark, but I'd like to give an economic explanation for how this economically functions.

The key point from gnasher729's answer's that the interest rate is 49.9% for one company.

While this may be much higher than the equilibrium rate, the true market interest rate, it is not completely unreasonable because of the risk.

For credit to be continually produced, default risk must be compensated because this is a cost to the lender. Most are not in business to lose money, so making loans to borrowers that default 40% of the time would make this interest rate reasonable.

For UK citizens, this would not be such a problem because the lender can usually pursue the borrower for the balance, but if the borrower can disavow the loan and leave the legal reach of the UK creditors, the collection rate is 0%.

The guarantee by the foreign persons not present in the UK is incidental and probably more of a regulatory requirement since the inability to collect from them is just as unlikely.

One should always look for the lowest price with at least minimum quality when shopping for anything, but you are right to be apprehensive legally. Read every line and be sure that you yourself understand every clause before signing.

If alternative cheaper financing is available, it is probably superior.