A loan guarantee, in finance, is a promise by one party (the

guarantor In finance, a surety , surety bond or guaranty involves a promise by one party to assume responsibility for the debt obligation of a borrower if that borrower defaults. Usually, a surety bond or surety is a promise by a surety or guarantor to pa ...

) to assume the

debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...

obligation of a borrower if that borrower defaults. A guarantee can be limited or unlimited, making the guarantor liable for only a portion or all of the debt.

Private loan guarantees

There are two main types: # Guarantor mortgages #

Unsecured guarantor loan A guarantor loan is a type of unsecured loan that requires a guarantor to co-sign the credit agreement. A guarantor is a person who agrees to repay the borrower’s debt should the borrower default (finance), default on agreed repayments. The guara ...

Guarantor mortgages

Popular with young borrowers who do not have a large deposit saved and need to borrow up to 100% of the property value to purchase a property. Generally, their parents will provide a guarantee to the lender to cover any shortfall in the event of default. There are three main types # Guarantor Mortgage – generally, a parent or close family member will guarantee the mortgage debt and will cover the repayment obligations should the borrower default. # Family offset mortgage – typically, a parent or grandparent will put their savings into an account linked to the borrower’s mortgage. They do not get any interest on these savings whilst offsetting the mortgage but will be able to get their money back in full once the mortgage has been paid down to between 70% and 80% of the property’s market value. # Family deposit mortgage – a family member will place a deposit in a dedicated savings account and is held as security against the properties mortgage. Interest is paid on this deposit, but if the borrower defaults on their repayments then money will be taken from this savings account.

Unsecured guarantor loan

An unsecured personal loan that is popular with borrowers who have a poor

credit rating A credit rating is an evaluation of the credit risk of a prospective debtor (an individual, a business, company or a government), predicting their ability to pay back the debt, and an implicit forecast of the likelihood of the debtor defaulting. ...

. They also require the

to meet the borrower’s obligations if they default on their loan repayments.

Government loan guarantees

The term can be used to refer to a government to assume a private

obligation if the borrower defaults. Most

loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that d ...

guarantee Guarantee is a legal term more comprehensive and of higher import than either warranty or "security". It most commonly designates a private transaction by means of which one person, to obtain some trust, confidence or credit for another, engages ...

programs are established to correct perceived

market failure In neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value. Market failures can be viewed as scenarios where indiv ...

s by which small borrowers, regardless of

creditworthiness A credit risk is risk of default on a debt that may arise from a borrower failing to make required payments. In the first resort, the risk is that of the lender and includes lost principal and interest, disruption to cash flows, and increased ...

, lack access to the credit resources available to large borrowers. Loan guarantees can also be extended to large borrowers for national security reasons, to help companies in essential industries, or in situations where the failure of a large company will harm the larger economy, For example,

Chrysler Corporation Stellantis North America (officially FCA US and formerly Chrysler ()) is one of the " Big Three" automobile manufacturers in the United States, headquartered in Auburn Hills, Michigan. It is the American subsidiary of the multinational automoti ...

, one of the "big three" US automobile manufacturers, obtained a loan guarantee in 1979 amid its near-collapse, and

lobbying In politics, lobbying, persuasion or interest representation is the act of lawfully attempting to influence the actions, policies, or decisions of government officials, most often legislators or members of regulatory agency, regulatory agencie ...

by labor interests. The loans are made by private lenders with the caveat that the government will pay off the loans if the company defaults on them. Chrysler did not go into default. Another example was the creation of the Emergency Loan Guarantee Board to administer $250 million dollars in US government loan guarantees made to private lenders on behalf of Lockheed in 1971. The program ended in 1977 when Lockheed restructured its debt to its 24 lending banks. Over $30 million in Guarantee commitment fees paid by Lockheed and its lenders to the board created over $29 million transferred to the US treasury.

Government programs and agencies

Bulgaria

* National Guarantee Fund

The Netherlands

SME loan guarantee scheme (BMKB)

United Kingdom

Enterprise Finance Guarantee The Enterprise Finance Guarantee (EFG) is a UK government-guaranteed lending scheme intended to help smaller viable businesses who may be struggling to secure finance, by facilitating bank loans of between £1,000 and £1 million. It is intended ...

United States

Fannie Mae The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company. Founded in 1938 during the Great Depression as part of the N ...

* Export-Import Bank *

Federal Family Education Loan Program The Federal Family Education Loan (FFEL) Program was a system of private student loans which were subsidized and guaranteed by the United States federal government. The program issued loans from 1965 until it was ended in 2010. Similar loans a ...

Freddie Mac The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is a publicly traded, government-sponsored enterprise (GSE), headquartered in Tysons Corner, Virginia.Government National Mortgage Association The Government National Mortgage Association (GNMA), or Ginnie Mae, is a government-owned corporation of the United States Federal Government within the Department of Housing and Urban Development (HUD). It was founded in 1968 and works to expa ...

Small Business Administration The United States Small Business Administration (SBA) is an independent agency of the United States government that provides support to entrepreneurs and small businesses. The mission of the Small Business Administration is "to maintain and stren ...

USDOE The United States Department of Energy (DOE) is an executive department of the U.S. federal government that oversees U.S. national energy policy and manages the research and development of nuclear power and nuclear weapons in the United States. ...

VA loan A VA loan is a mortgage loan in the United States guaranteed by the United States Department of Veterans Affairs (VA). The program is for American veterans, military members currently serving in the U.S. military, reservists and select surviving s ...

USAID Development Credit Authority

U.S. Department of Agriculture (USDA) Farm Service Agency (FSA) loans

U.S. Department of Agriculture (USDA) Rural Development (RD) loans

References

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