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 pay ...
) 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 on agreed repayments. The guarantor is often a fam ...
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.
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 pay ...
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
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 ...
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 ...
guarantee 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 automotiv ...
, 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 agencies. Lobbying, whic ...
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.
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 ...
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 ...
*
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
*
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 stre ...
Surety
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 pay ...
*
Promissory note
A promissory note, sometimes referred to as a note payable, is a legal instrument (more particularly, a financing instrument and a debt instrument), in which one party (the ''maker'' or ''issuer'') promises in writing to pay a determinate sum of ...
*
Usury
Usury () is the practice of making unethical or immoral monetary loans that unfairly enrich the lender. The term may be used in a moral sense—condemning taking advantage of others' misfortunes—or in a legal sense, where an interest rate is c ...