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Pay Phone Near Me - designaehelp Guaranteed Loan Guaranteed Loan: Definition, How it Does It Work, Examples

By Julia Kagan

Updated October 20, 2021

Review by Thomas J. Catalano

Fact checked by Skylar Clarine

What is a Guaranteed Loan?

A guaranteed loan is a loan that is guaranteed by a third party, or assumes the obligation to repay in the case that the borrower fails to pay. In some cases, a guaranteed loan is backed by a government entity, which will purchase the debt from the lending financial institution and assume accountability in the loan.

Key Takeaways

A guaranteed loan is a kind of loan that the third party promises to pay in the event that the borrower should default.

A secured loan can be used by those with poor credit or little in the way of financial resources; it enables financially unattractive candidates to get the loan and ensures that the lender won’t lose funds.

Guaranteed mortgages as well as federal student loans as well as payday loans are all examples of guaranteed loans.

The guarantee of mortgages is usually provided by the Federal Housing Administration or the Department of Veterans Affairs. 12 federal student loans are backed by the U.S. Department of Education; payday loans are guaranteed by the lender’s paycheck.3

How a Guaranteed Loan works

A guarantee loan agreement can be signed in the event that a borrower is an unattractive applicant for a standard bank loan. It is a way to help those who require financial aid to obtain funds when they otherwise may not be able to obtain them. And the guarantee means that the lending institution will not take on a risky position when issuing these loans.

Types of Guaranteed Loans

There are many secured loans. Some are safe and reliable ways of raising funds, while others carry risks that can include unusually high interest rates. The borrower should be aware of the conditions of any guaranteed loan they’re thinking about.

Guaranteed Mortgages

One example of a guaranteed loan is a mortgage that is guaranteed. The third party guaranteeing these home loans usually is the Federal Housing Administration (FHA) or Department of Veterans Affairs (VA).12

Homebuyers who are considered to be risky borrowers–they aren’t eligible for a conventional loan, for example, or they don’t have an adequate down payment and must borrow close to the total amount of their house’s worth–may be eligible for a guarantee mortgage. FHA loans require that borrowers pay mortgage insurance to protect the lender in case the borrower fails to pay their home loan.1

Federal Student Loans

Another kind of secured loan is the federal student loan which is insured by an agency of the federal government. Federal student loans are the simplest student loans to qualify for–there is no credit check and they come with the most favorable terms and low interest rates due to the fact that the U.S. Department of Education assures them using taxpayer dollars.3

If you want to apply for a federal student loan it is necessary to complete and submit the Free Application to Federal Student Aid, or FAFSA, each year that you want to remain in the federal student aid program. The repayment of these loans begins after the student has graduated from the college or falls below half-time enrollment. A lot of loans also have an grace period.3

Payday Loans

The third type of guaranteed loan is a payday loan. When a person takes out a payday loan, their paycheck is the third party who guarantees the loan. The lending company gives the borrower the loan and the borrower then writes the lender a post-dated cheque which the lender cashes on that date–typically two weeks after. Sometimes, lenders require electronic access to a borrower’s account to pull out funds, however, it’s recommended not to sign onto the guarantee of a loan in such a situation particularly when the lender isn’t a traditional financial institution.

Payday guaranteed loans frequently trap borrowers in an endless cycle of debt that can have rates of interest that can reach 400% or more.4

The problem in payday loans is that they tend to lead to a cycle of debt, which could cause further problems for people who are already facing financial difficulties. This can happen when the borrower isn’t able to come up with the funds to pay off the loan when they reach the conclusion of their typical two-week period. In such a scenario, the loan is converted into a new loan with a whole new set of charges. The interest rates could be as high as 400% or more–and lenders typically charge the highest rates allowed under local laws. Some lenders who are not careful may attempt to make a loan payment prior to the date of posting, which creates the risk of overdraft.4

Alternatives to payday-guaranteed loans are personal loans, which are available via local banks or on the internet cash advances from credit cards (you can save a significant amount over payday loans even with rates for advances that are as high as 30%) as well borrowing funds from friend or relative.