What is a guaranteed loan?
A guaranteed loan is one in which a third party supports the borrower by promising to repay the debt if the borrower defaults or stops making payments. The federal government is typically the backer of guaranteed loans.
For a lender to grant a loan to a high-risk borrower or for a high-risk property, the borrower needs additional financial support. Without it, he or she is not likely to obtain a loan. A guaranteed loan can cover most of the risks for the lender and usually is backed by a government agency, such as the U.S. Department of Agriculture.
The USDA’s Farm Service Agency guarantees loans to family farmers and ranchers to buy land or to finance production. Another division of the USDA, the Rural Housing Service, guarantees mortgage loans for low-income people in rural areas. The Small Business Administration, a federal agency, guarantees loans for start-up businesses and existing small businesses.
Guaranteed loan example
James runs a small farm in eastern Kentucky and needs new machinery that costs $90,000. James cannot afford to buy the equipment and knows he may not qualify for a loan large enough to pay for it. He contacts the USDA Farm Service Agency, or FSA, which works with certain approved commercial lenders. James and an approved lender apply for the guarantee with the FSA, which reviews James’ eligibility, his ability to repay the loan and other criteria.
After the review process is over, the FSA approves James and his lender’s request for a loan guarantee. The FSA is willing to guarantee a loan for up to $100,000. James closes on the loan and the lender gives him the money. If the lender suffers a loss, the FSA will reimburse the lender according to the terms of the guarantee agreement.
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