Wikipedia defines a loan guarantee as a promise by one party, called the guarantor, to assume the debt obligation of a borrower if that borrower defaults. There are two prominent examples of a guaranteed loan that you may be familiar with. You are most likely acquainted with private citizen guaranteeing a loan, commonly referred to as a cosigner, and government agencies.
There are a number of government backed loans that many people are familiar with. Just a small sample of government guaranteed loans are the Canada Small Business Financing Program, the United Kingdom’s Small Firms Guarantee Loan, both for the purpose of making starting a business more feasible. Also ,in the United States, there are the housing programs Fannie Mae and Freddie Mac, and for students wanting to attend a college or university the Federal Family Education Loan program. Similar to the cosigner backed loan, the government guaranteed loans improve bank’s ability to provide services to people who would otherwise not qualify for the money they need without increasing the risk to the bank or financial institution.
Typically a cosigner is a parent with a good credit rating guaranteeing a loan for a child who has not yet established credit in their own name. The loan will be in the name of the child, guaranteed by the parent. The bank or financial institution reduces their risk by allowing a parent to cosign, thereby the parent would become responsible for the debt should the child neglect their obligations. The cosigner is not always a parent, nor is the debtor always a child, however the cosigner is always responsible in the event that the loan holder defaults.
In the situation of a cosigned loan, the party responsible for repaying the loan is the guarantor. They are, essentially, also the main party whose credit will be under scrutiny in the application process. The bank will examine banking history, credit rating, and debt-to-income ratio to determine the results of the loan application.
The website at http://www.consumer.ftc.gov/articles/0215-cosigning-loan has a lot of good advice and should be carefully read should you be considering cosigning a loan for someone. It contains cautions such as to “… think about the obligations involved and how they may affect your own finances and creditworthiness. ” and that “… when you agree to cosign a loan, you’re taking a risk a lender won’t take.” It also notes some of the requests that can be made of the lender on their behalf for their protection and to limit their risks.
The bottom line is that if you are seeking a loan and you are not qualified there may be a government program suited to your needs that will allow you to secure the finances you need. Also, if you are asking someone to cosign for you, you are putting their financial security at risk should you not follow through on your obligation. If you are the party being asked to cosign you should make that decision very carefully, and be very quick to decline if you sense the possibility that they may default.