What is a loan guarantee? Definition and meaning

A Loan Guarantee is a pledge by one party to become liable for a debt obligation if a borrower defaults. The guaranteeing party is called the guarantor.

The guarantor might be liable for just a portion of the debt (limited guarantee) or all of it (unlimited).

Young borrowers who do not have enough for a large deposit when buying a house and need a 100% mortgage (borrow 100% of the property value) commonly have a guarantor, who is usually a parent or relative. This person provides a guarantee to the lender to pay for any shortfall in the event of default.

Loan guarantees in the US

In the United States, there are several government-sponsored loan guarantee schemes. For example the Department of Veterans Affairs (VA) offers a VA loan service which guarantees mortgages. It was designed to offer long-term financing for American veterans (ex-servicemen and servicewomen) and their surviving spouses.

The US Small Business Administration, a government agency, has several federally-sponsored loan guarantee schemes, such as its 7(a) Loan Program, Disaster Loans, Microloan Program, and several more.

Other agencies that guarantee loans include Fannie Mae, the Federal Family Education Loan Program, Freddie Mac, the Government national Mortgage Association, and USDOE.

Loan guarantees in the UK

In the United Kingdom, the Enterprise Finance Guarantee (EFG), a government-guaranteed lending scheme, facilitates lending to viable companies that have been refused a loan or other form of debt finance due to inadequate security or a proven track record.

In such cases, EFG says it might be able to turn that refusal into an acceptance by offering a guarantee. However, the agency stresses “That is a decision for the lender and will only be considered if the lender is satisfied that your business is viable and can afford the loan repayments.”

According to London South East:

“(A loan guarantee scheme is) a facility whereby banks are able to lend to firms that would not otherwise qualify for bank finance due to lack of track record.”

State-guaranteed loans for individuals

Sometimes, the guarantor might be the government or a government agency.

  • The United States

The U.S. Department of Veterans Affairs offers a loan guarantee program for veterans and service members. It provides a government-backed guarantee for mortgages.

  • The United Kingdom

In the United Kingdom, ‘Help to Buy’ is an equity loan scheme that helps first-time buyers who can only afford a very small deposit (down payment). It is, in effect, a loan guarantee.

State-guaranteed loans for major corporations

Since the turn of the century, three major incidents – the 2007/8 Financial Crisis, the Great Recession that followed it, and the COVID-19 Pandemic – triggered major bailouts by the government. On those occasions, major banks and other businesses needed help.

  • The United States

While most borrowers who require a guarantor to get a loan tend to be either young individuals or non-established businesses, sometimes the borrower could be a major corporation. In 1979, American car giant Chrysler Corporation obtained a loan guarantee when it nearly collapsed.

  • Canada

Air Canada received significant financial assistance during the COVID-19 pandemic in the form of loan guarantees. Without this help, the airline might have collapsed.

  • United Kingdom

Rolls-Royce Holdings (2020, COVID-19): £2 billion loan guarantee.

Barclays PLC (2008, Financial Crisis): Benefited from a government bailout to stabilize the banking sector.

  • France

Renault (2020, COVID-19): €5 billion loan guarantee.

BNP Paribas (2008, Financial Crisis): Part of a government plan to bolster bank balance sheets.

  • Germany

Lufthansa (2020, COVID-19): Part of a €9 billion bailout.

Commerzbank AG (2008, Financial Crisis): Received state aid and guarantees as part of a rescue package.

  • Australia

Qantas Airways (2020, COVID-19): Received government financial support.

Virgin Australia (2020, COVID-19): Sought a government loan guarantee but ultimately went into voluntary administration.

  • Japan

Japan Airlines (2010, post-financial crisis): Government-backed bailout.

Toshiba (after 2008, Financial Crisis): Received various forms of government support for its nuclear business overseas.

  • New Zealand

Air New Zealand (2020, COVID-19): NZ$900 million loan provisions.

Fletcher Building (post-2008, Financial Crisis): Received support via government infrastructure projects stimulus.

  • South Korea

Asiana Airlines (2020, COVID-19): Part of a 2.4 trillion won support package.

Hyundai Motor Company (2008, Financial Crisis): Benefited indirectly from government measures to protect the economy, including credit guarantees.

Video – What is a Loan Guarantee?

This educational video, from our sister channel on YouTube – Marketing Business Network, explains what a ‘Loan Guarantee’ is using simple and easy-to-understand language and examples.