A loan guarantee, in finance, is a promise by one party (the guarantor) to assume the debt 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
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 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.
Unsecured Guarantor Loan
An unsecured personal loan that is popular with borrowers who have a poor credit rating. They also require the guarantor 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 obligation if the borrower defaults. Most loan guarantee programs are established to correct perceived market failures by which small borrowers, regardless of creditworthiness, lack access to the credit resources available to large borrowers.
Loan guarantees can also be extended to large borrowers for political reasons. For example, Chrysler Corporation, one of the "big three" US automobile manufacturers, obtained a loan guarantee in 1979 amid its near-collapse, and lobbying by labor interests. Somewhat differently, despite intensive lobbying by the Israel lobby, President George H. W. Bush refused $10 billion in loan guarantees to the Israeli government of Yitzhak Shamir because of his pro-settlement policy and because Palestinians and many Arab governments viewed the prior acceptance of loan guarantees as an indicator of America's lack of credibility as a mediator.
Bush requested and received a Congressional delay in discussion of the guarantees, and the Madrid Conference of 1991 was later convened. These loan guarantees were issued later, following the election of Itzhak Rabin and his pledge to end Shamir's settlement policy and reformulate national priorities.