The Single Best Strategy To Use For Payday Loans Near Me 550 Revealed

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Guaranteed Loan: Definition, How It Works, Examples

By Julia Kagan

Updated October 20 and 2021.

Written by Thomas J. Catalano

Fact checked by Skylar Clarine

What is a Guaranteed Loan?

A secured loan is an loan that is guaranteed by a third party, or assumes the debt obligation for–in the case of default by the borrower. Sometimes, a guaranteed loan is backed by a government agency that will purchase the loan from the financial institution lending it and then assume the accountability to pay the loan.

The most important takeaways

A guaranteed loan is a kind of loan in which the third party is willing to pay the loan if the borrower should default.

A guaranteed loan is a loan that is guaranteed to borrowers with bad credit or who have little in the way of financial resources. It enables financially unattractive candidates to get an loan and guarantees that the lender will not lose funds.

Guaranteed mortgages and federal student loans and payday loans are all examples of guaranteed loans.

Guaranteed mortgages are typically backed with the Federal Housing Administration or the Department of Veteran Affairs;12 federal student loans are guaranteed by the U.S. Department of Education; payday loans are guaranteed by the borrower’s paycheck.3

How a Guaranteed Loan Functions

A guaranteed loan agreement can be signed when a borrower is an unattractive applicant for a standard bank loan. It is a way for people who need financial assistance to secure funds when they otherwise may not be eligible for the funds. The guarantee ensures an institution lending the money does not take on a risky position when issuing these loans.

Different types of Guaranteed Loans

There are many secured loans. Some are safe and reliable ways of raising money, but others involve risk that could include expensive interest costs. It is important to carefully read the conditions of any guaranteed loan they’re thinking about.

Guaranteed Mortgages

One example of a guaranteed loan is a mortgage with a guarantee. The third party that guarantees these home loans in most instances is usually the Federal Housing Administration (FHA) or Department of Veterans Affairs (VA).12

Homebuyers who are considered to be risky borrowers–they don’t qualify for a conventional mortgage, for example, or they do not have enough down payment and have to take out a loan that is close to the total amount of their home’s value–may get a guaranteed mortgage. FHA loans require that borrowers pay mortgage insurance to safeguard the lender in the event that the borrower fails to pay their home loan.1

Federal Student Loans

Another type of guaranteed loan is the federal student loan, which is guaranteed by an agency of the federal government. These federal loans are the easiest student loans to obtain because they require no credit check and they come with the most favorable terms and the low interest rates due to the fact that the U.S. Department of Education guarantees them with taxpayer dollars.3

In order to apply for federal student loan, you must complete and submit the free Application of Federal Student Aid, or FAFSA, each year that you wish to be in the federal student aid program. The repayment period for these loans begins after the student leaves college or drops below half-time enrollment. A lot of loans also come with a grace period.3

Payday Loans

The third kind of guaranteed loan is one called a payday loan. When a person takes out the payday loan, their paycheck plays the role of the third party who guarantees the loan. A lending institution gives the borrower a loan and the borrower sends the lender a post-dated cheque that the lender pays on the same date, typically two weeks after. Sometimes lenders will require access to an electronic borrower’s account to pull out funds, however, it’s recommended not to accept a guaranteed loan in such a situation particularly when the lender isn’t a traditional bank.

Payday guaranteed loans frequently trap borrowers in an endless cycle of debt that can have rates of interest that can reach 400% or more.4

The issue of payday loans is that they tend to create an unending cycle of debt that can create additional issues for those already in tough financial straits. This can happen when a borrower doesn’t have the money to pay back his loan at the end of their typical two-week timeframe. In this scenario the loan rolls into another loan with a whole new round of fees. Rates of interest can be up to 400% or more–and lenders typically charge the highest interest rates that are permitted under local laws. Some unscrupulous lenders may even try to cash a borrower’s check prior to the date the check was posted this can lead to the risk of overdraft.4

Alternatives to payday-guaranteed loans are personal loans that are accessible at local banks and on the internet, credit card cash advances (you could save money when compared to payday loans even with rates for advances that are as high as 30 percent) or borrowing from a friend or relative.

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