How Guaranteed Loans Work

A guaranteed loan refers to any loan that is covered or sponsored by a third party.

That means that if the borrower defaults on the loan, then the third party

assumes responsibility for the loan. This differs from a guarantor loan in one

major way- guaranteed loans are usually sponsored by government agencies,

whereas guarantor loans are usually sponsored by an individual who is known to

the borrower.

Let’s take some time to examine guaranteed loans and the way they work. That

way, you can decide for yourself if they are going to be a good option for you.

The Application Process

Guaranteed loans begin with an application, as do any loans. There is no instant

approval, and everyone who wants one has to go through this process.

It starts when the applicant goes to the lender for a loan. At the same time, the

borrower needs to go to a government agency that guarantees loans and apply

through them for the same loan. The applicant should be making it clear to the

lender that they intend to use a third party, because the lender will have to go

with the applicant before the government agency to apply for the government

guarantee on the loan. Alternatively, they may be able to do the application

process online.

This then creates two application process. The lender will look over the

borrower’s loan application and give their approval or rejection of it. Usually after

the lender approves the loan, the government agency will then look over the loan

application and decide to approve or reject it.

During both processes, the applicant’s financial information will be considered.

The government agency will assess their bills and income and decide if they are a

good fit for the loan. Like any lender, the government will want to ensure that the

borrower is a low risk candidate for the loan. While the government will have to

cover the loan, if it is defaulted on, they don’t want to have to do that.

The Conditions of the Loan

Once the loan has been approved, the borrower no longer becomes the lender’s

customer. Now they are the government agency’s customer and they will process

all their loan transactions through them. Any queries about the loan and

arrangements for repayment will be handled directly through the government

agency. At this point, the lender is doing business with the government agency

instead of the borrower.

The government agency acts as a go-between for the two parties- the lender and

the borrower. They facilitate everything and ensure the loan is being handled

properly. This is their only task unless the borrower fails to repay the loan on

time. Then the loan will be labeled as defaulted, and the third party government

agency will take over the responsibility of repaying the loan.

Typically, the agency will cover up to 95% of the total loan amount and interest.

Once the loan has been approved, the agency will tell the borrower to close the

loan with the lender. At that point, the lender gives the money to the agency and

signs an agreement with them about reimbursement terms. All money sent to the

government agency by the borrower will be passed on to the lender.

The borrower will have no further dealings with the lender from there. The

agency will assume full responsibility for the loan, as far as the lender is

concerned. The terms of the loan are still in effect at this point, and the borrower

is required to honor those with the government agency.

When Are These Loans Applicable?

You cannot use a government-funded guaranteed loan for everything, obviously.

The government has no interest in guaranteed loans that fall outside certain


There are guaranteed loans for the industries like farming and agriculture, as well

as loans for college and other personal needs. The government may even cover a

borrower for a house loan. Which loans are available for guaranteed status and

coverage by the government will depend on where you live. Whether or not the

government actually approves such a loan will depend on your income, your

credit score and what you plan to use the loan for.

The government may enforce the use of the loan money, ensuring that you use it

the way you agreed upon with them. If you fail in this part of the agreement, you

may incur penalties and have the loan taken from you. Be sure to read all the

terms of any guaranteed loans you apply for before you actually agree to them.