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A loan guarantee means another party will pay off your loan if you can’t. It’s one of the government’s favorite ways to encourage lenders to work with underserved businesses and communities. But it shouldn’t be confused with a loan that you’re guaranteed to be approved for — those typically aren’t legit.
A loan guarantee is a legally binding promise to a lender that a third party will pay off a loan balance if the borrower misses payments or defaults. The third party is called a guarantor. The most common types of guarantors are the government and individuals.
If you hear a loan is backed by the government, that means it’s a guaranteed loan, with the government as the guarantor.
The purpose of a loan guarantee is to make it easier for borrowers to qualify for a loan by taking some of the risk off the lender. A guarantee can make it easier to qualify for competitive rates and terms if you don’t meet typical credit, income or revenue requirements.
The government often offers guarantees as a way of promoting economic growth in underserved areas. Business lenders often ask for a personal guarantee from business owners to share the responsibility for the loan should the business go under.
While both guaranteed and secured loans are less risky to the lender, they aren’t quite the same.
Business loans and mortgages are the most common types of loans guaranteed by the government. Here’s how a few programs break down:
The Small Business Administration (SBA) backs between 75% and 85% of every SBA loan, though it depends on the program. It’s designed to give small businesses an easier time accessing low-cost financing, and it even works with startups. Lenders that offer SBA loans must meet its guidelines, which include caps on how much it can charge in rates and fees.
The US Department of Agriculture (USDA) offers several different loan programs for businesses and individuals, including:
The State Small Business Credit Initiative (SSBCI) offers an alternative to SBA loans issued by the state. With this program, states guarantee up to 80% of each loan offered by participating lenders. Like the SBA, the SSBCI sets guidelines for the terms and conditions for the loan.
The Department of Energy (DOE) offers several loan guarantee programs to support different types of energy projects. These include:
Typically, when lenders refer to a guaranteed personal loan, it’s a no-credit-check loan for borrowers with bad credit. It’s a totally different type of loan than a loan with a guarantee — there’s no third party backing your loan to make it easier to qualify for a good deal.
You might want to stay away from these — no reputable lender will guarantee that you’ll get approved for a loan.
Most guaranteed loans are backed by the government. But if you take out a business loan, you’re usually required to back it with a personal guarantee — even if you’re putting down collateral.
Read our guide to business loans to find out more about funding options for your company. Or, check out our personal loans guide to learn how else you can borrow.
Here’s where to get financial help for yourself and your business if you’ve been affected by the storm in February 2021.
The White House announced new changes to PPP loans, helping the smallest businesses and opening access to people with student loan defaults or nonfraudulent felony convictions.
Small lenders continue to offer a lifeline to small businesses for First and Second Draw loans.
Lenme connects borrowers to investors through its simple app.
Compare 6 lenders to find one that’s a good fit for your needs.
The PPP wasn’t made with sole proprietors and independent contractors in mind. Here are other options that can help.
A lender who primarily offers loans to underserved small business owners.
Some PPP borrowers can get another round of funding through community lenders — though not all can qualify.
Ascent guides women entrepreneurs through key steps to starting a business. But its disaster assistance is too little, too late.
You only have until the end of March to get your next application in.