What is a Standby Letter of Credit?

@wearedr - You bring up a good point, there are both pros and cons associated with banks guaranteeing their customers' lines of credit with third part organizations.

The benefit of banks guaranteeing credit lines and other loans is that it can potentially offer banks another form of revenue. They can charge their customers interest for loaning them money. This interest provides another cash flow for the bank.

However, a drawback to banks for guaranteeing loans is potentially losing money. This can happen when too many customers default on their third party loans at the same time. If they bank does not have enough cash on hand, then they will not be able to pay all of their customers' debt at the same time.

I am not sure why the government decided not to allow US banks to guarantee loans. Maybe it was out of fear that banks would crash if they had to take on too much consumer debt.

I studied some international banking in college. I know a little bit about banking, so I thought I should share my knowledge to supplement this article.

In most developed countries, there is no need for banks to issue standby letters of credit. Instead, banks automatically guarantee all third party lines of credit of their customers. The United States, however, does not offer bank guarantees. Banking legislation prevents banks from automatically guaranteeing their customers' loans.

To get around this legislation, American banks established the system of a standby letter of credit. This is the only way that a bank could legally guarantee a customer loan to a third party vendor. Instead of this guarantee being automatic like it is in other countries, a customer has to specially request it.

I still have not decided whether or not I think US banks should offer automatic guarantees. There are pros and cons for offering them. The fact that they do not is another example of how US policies are different than those of other parts of the world.

When I lost my job a few years ago, I could not pay the mortgage on my house. I was in a really tough situation, and I did not want to lose the house because I was just about to get married. Thankfully, I had always paid all my bills on time, so I had a good credit history.

I was able to get a standby letter of credit from my bank. They allowed me to borrow money from them at a 5% interest rate, and I used that money to pay my mortgage. When I got back on my feet, I no longer needed the standby letter of credit from the bank, so I canceled it without any problems.

If it was not for the bank that helped me out, I would have lost my house. Standby letters of credit are a way for honest people to maintain their lives while they go through hard times. I am thankful to the bank for giving me a second chance.

I work for a bank that use to offer some of our customers standby letters of credit. We pride ourselves on being a family bank that cares about our customers. So when life challenges occur and people cannot pay their car notes and mortgages, we would offer them a standby letter of credit. The greater your credit score, the more likely you were to receive the line of credit.

But, when the recession hit, more and more customers were asking for standby letters of credit. Some people had an especially hard time paying back their mortgages. Our bank could not afford to give all of these customers a line of credit, so we got rid of our standby letters of credit all together.

Hopefully, we can offer them in the future. We lost a lot of customers when we could not offer them credit. Customers like to see that their bank can back them up when they get into some financial trouble.