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What is a loan guarantee?
It's designed to make it easier for underserved businesses and communities to find financing.
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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.
What is a guarantee on a loan?
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.
What is the purpose of a loan guarantee?
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.
Guaranteed vs. secured loans
While both guaranteed and secured loans are less risky to the lender, they aren’t quite the same.
- Guaranteed loan. Makes a person or entity responsible for paying back the loan if the borrower defaults.
- Secured loan. Backs the loan with an asset as collateral — like a savings account or a car. If the borrower defaults, the lender can seize and sell the collateral to recoup its losses.
10 loan guarantee programs
Business loans and mortgages are the most common types of loans guaranteed by the government. Here’s how a few programs break down:
SBA loan guarantee program
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.
USDA loan guarantee programs
The US Department of Agriculture (USDA) offers several different loan programs for businesses and individuals, including:
- USDA Business and Industry (B&I) Guaranteed Loan Program. Up to an 80% guarantee on funding for rural small businesses.
- USDA Rural Development Guaranteed Housing Loan Program. Up to 90% guarantee on a mortgage for low-income families in rural areas.
- USDA Farm Service Agency (FSA) Guaranteed Farm Loan Program. In addition to directly funding farmers, the USDA’s FSA backs loans for buying or operating a farm, as well as contracting and conservation.
SSBCI loan guarantee program
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.
DOE loan guarantee programs
The Department of Energy (DOE) offers several loan guarantee programs to support different types of energy projects. These include:
- Advanced Fossil Energy Projects Guaranteed loan guarantees. Government-backed loans for projects that reduce fossil fuel emissions, like carbon capture and high-efficiency power systems.
- Advanced Nuclear Energy Projects loan guarantees. Funding for projects that use nuclear energy technology that can reduce carbon emissions, like building or upgrading nuclear reactors.
- Advanced Technology Vehicle Manufacturing loan guarantees. Loans to support projects to develop light-duty, energy-efficient vehicles and machinery.
- Renewable Energy and Efficient Energy Projects loan guarantees. Funding for projects that would help reduce greenhouse gas emissions.
- Tribal Energy Loan Guarantee Program (TELGP). A partial guarantee for energy development projects on tribal territory.
Find even more business loan options
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What’s a guaranteed personal loan?
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.
Bottom line
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.
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