Posted in Finance, Accounting and Economics Terms, Total Reads: 105
Definition: Guaranteed Loan
Guaranteed Loan is a loan which is guaranteed by an external third party incase the borrower is unable to pay on time, where the third party is someone who is not involved in the lending and borrowing process of the loan transaction. These third parties have no direct say; the loan amount is sanctioned to the borrower by the lender but is influenced by the third party’s status. Third parties can be of various types.
These loans are quite often guaranteed by an agency controlled by the government and it purchases the debt from the financial institution which is lending and takes up full responsibility for the loan. Generally guaranteed loans are not required as while giving a loan, financial institutions takes some collateral of the same or higher value of the loan amount being sanctioned but in some cases it does not suffice. The primary reason is that the financial status of the borrower is not very attractive. Guaranteed loans thus make a way for people with unattractive financial profiles and in dire need of money to get loans and acquire loans without putting the lending institution into too much risk. The financial institution lending the money abbeys its risk by getting the loans guaranteed.
For example: A person borrows some amount of money from a bank and is not too well off and does not have the required minimum bank balance as demanded by the bank, he gets it only when his department, a government institution offers to guarantee his candidature for the loan.