It is highly unethical (and in some places) illegal to offer a loan guarantee, yet unscrupulous loan brokers, mortgage brokers and financial consultants offer them.
Sometimes, clients working with business loan brokers ask for a guarantee that their business funding application will be approved and funding granted. Loan brokers offering loan guarantees is ridiculous since they are not the funding entity.
A loan guarantee is a promise (verbal or written) by one party (a guarantor) to assume the debt obligation of a borrower if that borrower defaults. It can be limited or unlimited, making the guarantor liable for either a portion or all of the debt.
A letter of guarantee is a type of contract issued by a bank on behalf of a customer who has entered a contract to purchase goods from a supplier and promises to meet any financial obligations to the supplier in the event of default.
A bank guarantee that is leased to a third party for a specific fee. The issuing bank will conduct due diligence on the creditworthiness of the customer looking to secure a bank guarantee, then lease a guarantee to that customer for a set amount of money and over a set period of time, typically less than two years. The issuing bank will send the guarantee to the borrower’s main bank, and the issuing bank then becomes a backer for debts incurred by the borrower, up to the guaranteed amount.
Leased bank guarantees tend to be very expensive; fees can run as high as 15% of the guarantee amount every year. The fee is usually made up of an initial setup fee and an annual fee, both of which will be a percentage of the dollar amount to be guaranteed, or covered by the issuing bank in the event that the company can’t promptly pay its debts.
Contingent guarantees are a common feature in international trade, especially when vendors conduct business with new customers in overseas markets. A contingent guarantee differs from a letter of credit, which is more commonly used in international trade. The former only comes into effect upon non-payment after a stipulated period by the buyer, whereas a letter of credit is payable by the bank as soon as the seller effects shipment and satisfies the terms of the letter of credit.
Contingent guarantees are also used as a risk-mitigation tool for large projects in nations with a high degree of political or regulatory risk, as well as in certain income-oriented financial instruments.
A guaranteed bond is a debt security that offers a secondary guarantee that interest and principal payment will be made by a third party, should the issuer default due to reasons such as insolvency or bankruptcy. A guaranteed bond can be municipal or corporate, backed by a bond insurer, a fund or group entity, or a government authority.
Bonds have an inherent risk of default that could mean a bondholder never gets the principal back upon maturity and loses out on periodic interest payments. A guaranteed bond removes this risk by creating a back-up payer in the event that the issuer is unable to fulfill its obligation. Because of this lowered risk, guaranteed bonds generally have a lower interest rate than non-guaranteed bonds.
A guarantor loan is a type of unsecured loan that requires a guarantor to co-sign the credit agreement. A guarantor is a person who agrees to repay the borrower’s debt should the borrower default on agreed repayments. The guarantor is often a family member or trusted friend who has a better credit history than the person taking out the loan and the arrangement is, therefore, viewed as less risky by the lender. A guarantor loan can, consequently, enable someone to borrow either more money, or the same amount at a lower rate of interest, than they would otherwise be able to secure through a more traditional type of loan.
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