Payday loans vs guarantor loans: what’s the best option for you?

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When you’ve got a bad credit score, it can often be difficult to decide what’s the best borrowing option for you. Do you borrow money from your parents? Do you try and put things on your credit card? Should you take out a guarantor loan? Or should you take out  payday loans to help get you through to payday?

That last solution is particularly appealing – payday loans can often feel like the quickest, easiest solution. You can borrow a relatively small amount of money that will get you through until the next payday. Even better, they’re incredibly likely to approve your application and you can have the money in your account almost instantly.

However, there is a catch. Well, several catches really.

Now, before we continue, we have to be honest: at Bamboo, we provide guarantor loans for people with bad credit. Of course, it’s in our best interest to say that guarantor loans are the preferable alternative to a payday loan.

But that’s not why we’re saying it – not at all.

You see, not all borrowing methods are created equal, and payday loans are second only to loan sharks (and other illegal methods of borrowing) in terms of risk.

But don’t take our word for it, here’s what Martin Lewis, The Money Saving Expert has to say about payday loans:

A payday loan feels easy, but even now the amount of interest you pay has been capped, these loans are an still an expensive nightmare. Take one out and you risk scarring your finances, and the possibility of paying back double what you borrowed.

We don’t like payday loans. Most people who get them shouldn’t.

The Money Advice Service also advises against payday loans:

If you have problems repaying a payday loan, the payday lender might tempt you with an extension known as a deferral or rollover, or even a further loan.

However, the lender must give you an information sheet with details of providers of free debt advice, before you roll over a loan.

Rolling over your payday loan might seem like a great solution at the time. But it can quickly lead to problems, because you’ll have to pay back much more in interest and other fees.

This could leave you struggling to pay for the essentials you need, such as rent, mortgage, food and heating.

Don’t assume that you can’t get a more suitable loan elsewhere – even if you have a poor credit rating.

Are there any circumstances when I should get a payday loan?

Honestly, probably not. Unless you’re 100% sure that you can repay them, in full and on-time, then paydays are always a huge financial risk. (And even then, there are better options.) Otherwise, taking out a payday loan is a huge risk.

For a start, there’s a lot of evidence to suggest that payday loan companies don’t thoroughly check whether or not you can afford to borrow the money in the first place. And, if you’re not in a position to repay at the end of the month, you can see the loan rolling over and over – costing you a lot of money.

The Office of Fair Trading investigated payday loans and found many causes of concern. In their report (which you can download in full) they say:

“Our concerns are twofold: first, whether affordability checks are undertaken to inform key decisions, including whether to renew or rollover a loan, as well as whether to make an initial loan; and second, where affordability assessments are carried out, whether they are adequate”.

Further, when they asked payday lenders whether they carried out affordability checks for their new customers, they discovered that almost 30% of payday lenders didn’t check whether their new customers could afford the loan before lending them the money.

Even worse, 78% of all payday lenders didn’t check affordability before rolling the debts over.

And to make matters worse…

And, just to compound things, the interest and APR rates for payday loans are often outrageously high – much, much higher than the alternatives.  Yahoo reports APR rates for payday loan companies can be as high as 1,737% at Kwickcash; 1178% at PayDayUK, 1,734% at QuickQuid, 1291% at Sunny and – brace yourself – 4,214% at Wonga.

To put that in very real terms, if you borrow £1,000 from PayDayUK and take a year to repay it, you’ll end up having paid £1,807.56 by the end of the year.

In contrast, if you’d borrowed £1,000 on a Bamboo guarantor loan, you’d have paid £1,235.72 over the course of a year.

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That’s how the payday spiral starts – if you can’t pay the first loan back on-time, the rollover can spiral out of control and turn a small, short-term loan into a large, long-term debt.

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A guarantor loan, on the other hand, doesn’t have any of these risks. You’re thoroughly checked before you apply for the loan, you agree to a fair and agreed-upon repayment plan and the APR isn’t designed to milk you of all of your money.

Sure, there are risks and costs associated with guarantor loans, like there are with any form borrowing, but they don’t even begin to compare to the risks presented by payday loans.

If you’re considering applying for a payday loan, why not see how much you could borrow from Bamboo with a guarantor loan? The quick test only takes five minutes and doesn’t affect your credit score – you’ll probably be surprised at what we can do to help. (Representative 49.7% APR.)

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