Friday 17 July 2015 6:11 am

Guarantor loans are "as damaging" as payday loans, Citizens Advice says

A charity has warned as Britain's regulators heap pressure onto payday lenders, problems linked with this sector are simply shifting to other parts of the market for credit products.

Citizens Advice said "guarantor loans", which allow borrowers to use the name of someone else, usually a friend or family member, as security for a loan. This person is then pursued by the lender in the case of default or arrears.

While the market for guarantor loans is a lot smaller than that of payday loans, Citizens Advice says they have evidence that it's growing.

"In 2013, the latest year for which good data is available, 53,000 people took out a guarantor loan and the market was worth £154m. This is a far smaller market than that for payday loans but we know that the market is growing."

"Companies House data shows the market’s largest lenders have grown since 2012 while the largest guarantor lender saw its turnover grow 30 per cent and its profits 40 per cent from 2013 to 2014."

Citizens Advice's said guarantor lending is very similar to payday lending however there are some differences such as the size of the loan, the interest rates and duration.

"Our market analysis suggests that guarantor loans are similar to payday loans in that they are delivered quickly, typically within 24 hours, and are marketed to borrowers with poor credit histories."

"However, they differ in three respects. First, they are larger, typically ranging from £1,000 to £7,500 (while the average payday loan is £260). Second, they attract lower interest rates, although still high by wider industry standards, ranging from 39.9 to 49.9 per cent and averaging 46.3 per cent. Third, they last longer, with the loan contract typically lasting from 12 to 60 months."