What is 'Guaranteed Loan'

A guaranteed loan is a loan guaranteed by a third party in case the borrower defaults. Sometimes, a guaranteed loan is guaranteed by a government agency, which will purchase the debt from the lending financial institution and take on responsibility for the loan. Another more common example of a guaranteed loan is a payday loan. When someone takes out a payday loan, their paycheck plays the role of the third party that guarantees the loan.

BREAKING DOWN 'Guaranteed Loan'

A guaranteed loan agreement is often made if the borrower is an unattractive candidate for a regular bank loan. It is a way for people in dire need of financial assistance to acquire funds, without putting excessive risk on the lending financial institution. 

Here’s how payday-style guaranteed loans works. The lending organization gives you the loan, and you write the lender a post-dated check and they cash it on that date – typically two weeks later. It's best to not sign onto guaranteed loans with lenders that require electronic access to your account to pull out funds, especially if the lender isn't a traditional bank.

Why Payday Guaranteed Loans Should Be Avoided

Payday loans create a cycle of debt, which can cause additional problems for people already in tough financial situations. This happens when a borrower doesn't have funds to repay the loan at the end of the typical two-week term. In such a scenario, the loan rolls into another loan with a whole new round of fees. Some unscrupulous lenders may even attempt to cash your check before the post date, which creates risk of overdraft.

Other reasons why you may want to avoid payday loans include:

  • Interest rates can be as high as 400 percent or more
  • Payday lenders typically charge the highest rates they’re allowed to charge, according to local laws

Alternatives to Payday Guaranteed Loans

Here are some popular, often far cheaper, alternatives to payday guaranteed loans:

  • Unsecured personal loan – It takes a few days longer to get the cash, but these types of loans are far cheaper and have longer loan terms. Personal loans are available through local banks or online.
  • Credit card cash advance – If it's a one-time need, you can save considerable money over payday loans even with rates being as high as 30 percent.
  • Borrow from a family member – Mixing family and money can be difficult, but it beats taking out a payday loan. Just be sure to set clear terms with your family member.
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