What is a loan guarantee?

When we speak about a loan guarantee in finance we denote the promise of the guarantor to a lender that the borrower will fulfil his or her obligations arising from a loan acquired.

Depending on the legal system of each country the loan guarantee takes deferent forms. Each one of these forms in real terms establishes a firm (or at least something close) promise that the borrower will be able to repay his debt (will not default). If not then the loan guarantee is utilized in order to fix things up and the financing institution will not have to deal with huge amounts of bad debts.

As said above, depending mainly on the legal system of a country concerning its financial standards the loan guarantees take a certain form. Certainly also the type of the loan plays a major role in the form of the guarantee requested. We even had in many cases in the past governments employing themselves into being offering some type of loan guarantees for either private as well as public organizations. Remember the case in 1979 and the loan guarantee received by the Chrysler Corporation, one of the three big US automobile manufacturers, from the US government in an effort not to default its obligation and survive.

Definitely in the case of personal loans, the financial institutions request other types of loan guarantees. It goes without saying that a government will not be willing to offer guarantee to an individual. However any financial institution in order to offer a loan to an individual should receive some kind of a guarantee. If the individual is not able to offer the requested guarantee, then most probably he or she will end up in the bad credit categorization something that will cause additional problems to the borrower. Seeking bad credit loans is not such a very good situation to be into.

Therefore the borrower should be ready to offer the requested guarantee to the lender and if not then he or she should find something of similar value to replace it. There are many examples we could use here to elaborate this and make it clearer. For example we might say that a bank for a certain loan might request you to offer a guarantee in fixed assets of equal value as the borrowed amount. If you do not posses such fixed assets the bank might be willing to accept something else such a letter of guarantee from another financial institution such as an insurance company. Definitely all these, as we mentioned previously depend of what really applies in the area you leave and its legal system.