What are Guaranteed Loans?

Guaranteed loans are loans that are structured to be covered by a party other then the borrower in the event that the loan falls into a default situation. The guaranteed loan may be covered by some type of government agency, or by a private third party. Loans of this type often come with competitive interest rates, since the lender assumes a smaller degree of risk.

With guaranteed loans that involve private parties, the structure of the loans involves the commitment of an individual or business other than the borrower as the backup source of repayment. This third party provides signed documentation that makes a formal commitment to assume control of the loan in the event that the borrower falls behind in the payments, and is unable to work out suitable arrangements with the lender. Depending on the prevailing regulations that apply in the jurisdiction where the loan is written, the lender may be required to provide the third party with all documentation related to the current arrears on the loan. In some cases, the lender will also need to provide evidence of the lender’s attempt to work out an amicable solution with the borrower.

Guaranteed loans may also be covered by a government agency. When this is the case, the agency makes a commitment to cover all or part of the principal remaining on the loan, as well as any interest that is due at the time the loan is declared in default. At times, this process is managed by the government agency actually purchasing the loan from the lender, working out new repayment terms with the borrower, and continuing to manage the loan until it is fully repaid. In other instances, the agency assumes the responsibility of making payments on the loan, while collecting the amount of the payments, plus applicable interest, from the original debtor. Most agencies that work with guaranteed loans provide specific guidelines for application, as well as contact information for institutions that offer these types of loans.

As with any type of lending situation, an applicant seeking a guaranteed personal loan must meet the criteria established by the lender in terms of credit rating, income level, and ability to repay the balance of the loan. Even with a guaranteed bad credit loan, there will be at least some qualifications that the borrower must meet before the loan application can be considered. Since laws related to lending vary from country to country, anyone seeking information on guaranteed loans should consult local financial professionals to determine if loan arrangements of this type are feasible, given the individual circumstances.