The Hidden Power of Guarantees in Community Development Finance

If you’ve ever had someone co-sign a loan for you, then you know how a guarantee works. That other person, maybe a parent or relative, is promising the bank that in case you can’t make your monthly payment, they’ll make the payment in your place. If all goes well, your parent or relative may never need to step up for you. This process is often a formality, but it can also be a prohibitive barrier if you don’t have a parent or relative with good credit.

Guarantees are a very common tool to support financial institutions themselves. The Federal Deposit Insurance Corporation, for example, insures bank deposit accounts up to $250,000 — so if a bank ever gets shut down, the FDIC promises to pay up to that amount to account holders. Deposit insurance is one form of a guarantee.

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