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Guaranteed Loan: Definition, How It Functions, and Examples

By Julia Kagan

Updated October 20, 2021

Reviewed by Thomas J. Catalano

Facts checked by Skylar Clarine

What is a guaranteed loan?

A secured loan is one type of loan that an outside party guarantees or takes over the obligation to repay in the case of default by the borrower. In some cases, a guaranteed loan is insured by a government entity, which will purchase the debt from the financial institution lending it and then assume the accountability to pay the loan.

Important Takeaways

A guaranteed loan is a form of loan in which the third party agrees to pay if the borrower fails to pay.

A guaranteed loan is a loan that is guaranteed to borrowers who have poor credit or a lack in the way of financial resources. It helps financially unattractive people to get a loan and ensures that the lender will not be able to recover the money.

Guaranteed mortgages and federal student loans and payday loans are all examples of secured loans.

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

What is a Garantied Loan Works

A guaranteed loan agreement can be signed for borrowers who are an unattractive applicant for a regular bank loan. It is a way for those in need of financial aid to obtain the funds they require when they might not be eligible for the funds. The guarantee ensures an institution lending the money will not have to take on excessive risk when issuing these loans.

Different types of Guaranteed Loans

There are several secured loans. Some are safe and reliable methods of raising money, but others involve risks that may include expensive interest costs. The borrower should be aware of the conditions of any guaranteed loan they’re thinking about.

Guaranteed Mortgages

A prime example of a guarantee loan is a mortgage with a guarantee. The third party guaranteeing these home loans usually is The Federal Housing Administration (FHA) or Department of Veterans Affairs (VA).12

homebuyers that are considered risky borrowers–they’re not eligible for a conventional mortgage, for instance, or don’t have an adequate down payment, and need to borrow up to 100% of the house’s worth–may be eligible for a guarantee mortgage. FHA loans are a requirement that borrowers pay mortgage insurance to protect the lender in the event that the borrower fails to pay their home loan.1

Federal Student Loans

Another type of guaranteed loan is the federal student loan which is insured by an agency of the federal government. These federal loans are the easiest student loans to qualify for–there is no credit test and they come with the most favorable terms and lowest interest rates because federal government agencies like the U.S. Department of Education assures them using taxpayer dollars.3

In order to apply for a federal student loan, you must complete and submit the free Application of Federal Student Aid, or FAFSA every year you intend to continue to be in the federal student aid program. Repayment on these loans starts when the student graduates from college or drops below half-time enrollment. A lot of loans also come with an grace period.3

Payday loans

The third kind of guaranteed loan is a payday loan. When someone takes out the payday loan, their paycheck serves as the third party that is responsible for the loan. A lending organization gives the borrower the loan, and the borrower writes the lender a post-dated check that the lender pays on the same date, typically two weeks after. Sometimes, lenders require electronic access to a account of the borrower in order to access funds, however, it’s recommended not to accept the guarantee of a loan in such a situation, especially if the lender isn’t a traditional financial institution.

Guaranteed payday loans typically trap borrowers into the cycle of debt, with rates of interest that can reach 400% or more.4

The problem of payday loans is that they tend to lead to a cycle of debt, which can cause additional problems for those who are already in tough financial straits. It can happen when a borrower doesn’t have the funds to repay the loan when they reach the conclusion of their typical two-week timeframe. In this case the loan is converted into a new loan with a new set of fees. Rates of interest can be as high as 400% or more. In addition, lenders typically charge the highest interest rates allowed under local laws. Some unscrupulous lenders may even try to make a loan payment prior to the date the check was posted and risk the possibility of overdraft.4

Alternatives to payday guaranteed loans include personal loans, which are available through local banks or on the internet, credit card cash advances (you can save a significant amount over payday loans even with rates for advances that are as high as 30%) or borrowing from a family member.


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Related Terms

Forbearance Definition What is it, Who qualifies Forbearance: Meaning, Examples and FAQs

Forbearance can be described as a method of repayment relief that involves the temporary delay of loan payments, typically for student loans.


Default: What Does It Mean What does it mean, what happens when you Default, Examples

A default happens when a borrower fails to pay the required amount on a loan, regardless of principal or interest.


What Is a Payday Loan? How Does It Work, How to obtain One and the Legality

The term payday loan is a type of short-term borrowing where a lender will extend high-interest credit based on your income.


What Is a Mortgage? Types, how they work and some examples

A mortgage is an loan that is used to buy or maintain real estate.


GSE stands for Government-Sponsored Enterprise. (GSE) The definition and Examples

A government-sponsored enterprise (GSE) is an entity of a quasi-government nature that facilitates the flow of credit to certain economic sectors through the provision of public financial services.


Student Debt Definition

Student debt is the term used to describe loans that are used to cover college tuition , which will be due once the student has graduated or leaves the school.


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