Loan Guarantee
A loan guarantee is a legal promise made by a third party (guarantor) to cover a borrower’s debt or other types of liability in case of the borrower’s default. Loans guaranteed by a third party are called guaranteed loans.
The guarantee can be limited or unlimited. An unlimited guarantee implies that the guarantor will cover the full amount of liability, while in a limited guarantee; the guarantor will cover only a portion of the liability.
Advantages of Loan Guarantee
There is a higher chance of successful application
Having a guarantor is added security for the lender, so there is a stronger chance your application will be accepted.
You could borrow more
Having the backing of a guarantor gives the lender extra peace of mind, so they are more likely to lend you a larger amount.
It is good for those with poor or little or no credit history
A guarantor loan allows those with poor credit history to add security to their repayments and so are a great option for those with bad credit. It is also commonly used for those with little or no credit history, such as young adults buying their first home.
It could boost your credit rating
Whenever you manage credit well, it should reflect in your credit rating. Making guarantor loan repayments in full and on time could go some way to repairing a poor credit history. Many lenders also offer you the option of making overpayments or repaying your loan early without additional charges, which gives you the option of reducing your loan term and total repayment cost.
Types of Loan Guarantee
- Personal Guarantee
- Bank Guarantee
- Financial Guarantee
Personal Guarantee: A personal guarantee is a legal promise made by an individual to repay credit issued to their business using their own personal assets in the event that the business is unable to repay the debt. Therefore, if the business defaults on its loan payments, the lender has the right to seize the business owner’s personal assets to recoup their losses. There are two types of personal guarantee (i) Unlimited Personal Liability and (ii) Limited Personal Guarantee.
Bank Guarantee: A bank guarantee is a financial instrument wherein a bank acts as the guarantor of the liabilities undertaken by the borrower/applicant. In other words, the bank agrees to pay the amount in case the borrower is not able to fulfil the conditions of the agreement. There are different types of bank guarantee i.e., Financial Guarantee, Performance guarantee and others.
Financial Guarantee: Financial guarantee refers to a promise made by one entity or person to the lender for the debt obligation of another entity or person such that if that entity is unable to meet the obligations, the entity taking the responsibility would pay on behalf.
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