Employees are accustomed to receiving an early payday around the beginning of December to fund their festivities, but this tends to lead to a ‘Christmas hangover’, as having to wait 6-8 weeks until the next pay date can find consumers penniless in early January.
Whilst borrowing from family and friends is always the smartest option, it is not surprising that consumers look for financial products online and are seduced by lenders advertising on prime TV and radio slots.
Of all the short-term loans considered, statistics released by Citizens Advice showed guarantor loans received a total of 850 complaints during the year 2016, a modest figure compared to the payday loans industry which generated an astonishing 29,000 cases. This was still nothing compared to the 188,000 for PPI.
But what this tells us is that guarantor lending, where you apply with an extra person to ‘guarantee’ your loan, presents a safer option for consumers. A low volume of complaints suggests good customer service, good rates and transparency of products. For the 12 guarantor lenders in the UK, they find that they are dealing more with the guarantor (the parent, spouse or friend) who has a good employment history, usually a homeowner status and strong credit score – so the process is straightforward and the risks are low.
In terms of cost, the Representative APR for guarantor loans ranges from 39.9% to 49.9%, the latter of which is held by Amigo, the most well-known lender in the industry. This works out at around 0.1% per day, for loans ranging from £500 to £15,000 that last between 12 and 60 months. (Source: Guarantor Loan Comparison)
The closest alternative for short-term lending is payday loans, which has a daily price cap of 0.8% and a Representative APR of around 1,110%. In some ways this could be a more effective option to overcome Christmas debt, because the loans (typically of up to £2,500) only last a few weeks or ‘until your payday.’ But the high costs and complaints volume suggests that this would not be a safe option.
Another strong option is to borrow through a credit union. These are non-profit and allow you to borrow a few hundred pounds at a Representative APR of 26.8%, with no late fees applying. The only issue is that the criteria is restricted to members only – those in the local vicinity – and funding can take 7-10 days. Therefore, guarantor loans could present a viable solution to consumers facing the ‘Christmas hangover.’
Daniel Tannenbaum is a Director at Tudor Lodge Consultants, providing marketing expertise for the insurance and consumer finance industries in the UK