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Guaranteed Loan Guaranteed Loan: Definition, How it Works, Examples
By Julia Kagan
Updated October 20, 2021
Written by Thomas J. Catalano
Fact checked by Skylar Clarine
What Is a Guaranteed Loan?
A guaranteed loan is one type of loan that is guaranteed by a third party, or assumes the debt obligation for–in the case of default by the borrower. Sometimes, a guarantee loan is guaranteed by a government entity, that will purchase the loan from the lending financial institution and assume accountability for the loan.
Key Takeaways
A guarantee loan is a form of loan in which an outside party agrees to pay if the borrower defaults.
A secured loan is a loan that is guaranteed to borrowers who have poor credit or a lack in the way of financial resources; it allows financially unattractive applicants to qualify for an loan and guarantees that the lender will not lose money.
Guaranteed mortgages as well as federal student loans and payday loans are all examples of guaranteed loans.
Guaranteed mortgages are typically backed with the Federal Housing Administration or the Department of Veterans Affairs. 12 federal student loans are guaranteed by the U.S. Department of Education; payday loans are guaranteed by the borrower’s paycheck.3
What is a Garantied Loan Functions
A guarantee loan agreement may be made for borrowers who are not a suitable candidate for a bank loan. It’s a means for those in need of financial aid to obtain funds when they otherwise may not be eligible for these loans. This guarantees that the lending institution will not take on a risky position when the issuance of these loans.
The types of Guaranteed Loans
There are several secured loans. Some are safe and reliable ways of raising funds, while others carry risks that can include unusually expensive interest costs. It is important to carefully read the terms of any guaranteed loan they’re considering.
Guaranteed Mortgages
A prime example of a guarantee loan is a mortgage that is guaranteed. The third party that guarantees these home loans typically is the Federal Housing Administration (FHA) or Department of Veterans Affairs (VA).12
Homebuyers who are considered risky borrowers–they’re not eligible for a conventional loan, for instance, or don’t have an adequate down payment and have to borrow up to 100percent of the home’s value–may get a guaranteed mortgage. FHA loans are a requirement that borrowers pay mortgage insurance in order to protect the lender in the event that the borrower fails to pay their home loan.1
Federal Student Loans
Another kind of secured loan is one that is a federal student loan which is insured through an agency within the Federal government. The federal student loans are the simplest student loans to get because there is no credit verification and they come with the most favorable terms and lowest interest rates since federal government agencies like the U.S. Department of Education assures them using taxpayer dollars.3
To be eligible for a federal student loan, you must complete and submit the free Application for Federal Student Aid, or FAFSA every year you want to remain in the federal student aid program. The repayment period for these loans starts when the student has graduated from college or drops below half-time enrollment. Many loans also come with a grace period.3
Payday loans
The third type of secured loan is the payday loan. If someone applies for a payday loan, their paycheck plays the role of the third party that guarantees the loan. A lending organization gives the borrower an loan and the borrower writes an dated cheque that the lender then cashes at the time of the date, usually two weeks later. Sometimes lenders will require access to an electronic 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 in the case of a lender that isn’t a traditional bank.
Guaranteed payday loans often ensnare borrowers in an endless cycle of debt that can have interest rates as high as 400% or more.4
The issue in payday loans is that they tend to lead to a cycle of debt, that can create additional issues for those who are already in tough financial straits. This can happen when the borrower isn’t able to come up with the funds to pay off their loan when they reach the conclusion of the usual two-week term. In such a scenario, the loan is converted into a new loan that comes with a brand new set of charges. The interest rates could be up to 400% or more. Lenders typically charge the highest interest rates that are permitted under local laws. Some lenders who are not careful may try to make a loan payment prior to the date of posting and risk the possibility of overdraft.4
Alternatives to payday-guaranteed loans include personal loans that are accessible via local banks or on the internet cash advances from credit cards (you can save considerable money when compared to payday loans even with rates for advances that are as high as 30%) or borrowing from a friend or relative.
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