Guarantee

Financial Dictionary -> Loans -> Guarantee

In layman's terms, a guarantee is a promise. Loan guarantees are governmental promises to take on the responsibility of paying of a private debt should its borrower default, unable to pay it off. The majority of loan guarantees have historically been created to fix the perception of market failure, when smaller borrowers, no matter what their credit score, cannot access the same credit as larger companies can. This is usually during times of economic recession or crisis

A loan guarantee might extend to large borrowers also, because of wider political reasons. An example of this would be the Chrysler Corporation, which was one of the big United States car manufacturers. In 1979 in the midst of lobbying by labor interests they were given a loan guarantee.

Other loan guarantees are there to support the wider economy. For example some governmental farming guarantees promise to pay up to 90 percent of a loan should the borrower default in order to keep the farming industry strong.

This process does not necessarily have to involve the government however. It could also be an agreement by an individual that puts forth another entity to be responsible for the loan repayment should they default. This backup could be another person, a business or another lender. The circumstances of these agreements are almost always on a one to one basis.

On a smaller scale a loan guarantee may refer to any individual agreements between a borrower and their lender, one being the option to change the terms of the loan at asset future date, or another might be the option to discuss a different interest rate.