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                                                                   Exhibit 10.2

                                PAYMENT GUARANTY

         This PAYMENT GUARANTY ("Guaranty") is made as of July 20, 1998, by UGLY
DUCKLING CORPORATION, a Delaware corporation ("Guarantor") for the benefit of
ARBCO ASSOCIATES, L.P.; KAYNE ANDERSON NON-TRADITIONAL INVESTMENTS, L.P.;
OFFENSE GROUP ASSOCIATES, L.P.; OPPORTUNITY ASSOCIATES, LIMITED PARTNERSHIP; and
NORTH POINTE FINANCIAL SERVICES, INC. (individually, a "Lender," and
collectively, the "Lenders").

                               FACTUAL BACKGROUND

         A. Guarantor is executing this Guaranty to induce each Lender to enter
into that certain Loan Agreement dated as of July 20, 1998, by and between
Cygnet Financial Corporation, a Delaware corporation ("Obligor"), and the
Lenders (the "Loan Agreement"). All capitalized terms used herein and not
otherwise defined shall have the meanings set forth in the Loan Agreement.

         B. Under the terms and conditions of the Loan Agreement, Obligor has
agreed to repay to the Lenders the Loans as evidenced by the Notes.

                                    GUARANTY

         1. Guaranty of Notes. Guarantor unconditionally guarantees to each
Lender the full payment of their respective Note. This is a guaranty of payment,
not of collection. If Obligor defaults in the payment when due of the Notes or
any part of any Notes, Guarantor shall in lawful money of the United States pay
to each Lender or to its order, on demand, all sums due and owing on the
applicable Note, including all interest, charges, fees and other sums, costs and
expenses.

         2. Rights of Each Lender. Guarantor authorizes each Lender to perform
any or all of the following acts at any time in its sole discretion, all without
notice to the Guarantor and without affecting Guarantor's obligations under this
Guaranty:

                  (a) Each Lender may alter any terms of any of its respective
         Note or any part of it, including renewing, compromising, extending or
         accelerating, or otherwise changing the time for payment of, or
         increasing or decreasing the rate of interest on, its respective Note
         or any part of it.

                  (b) Each Lender may take and hold security of the Notes or
         this Guaranty, accept additional or substituted security for either,
         and subordinate, exchange, enforce, waive, release, compromise, fail to
         perfect and sell or otherwise dispose of any such security.

                  (c) Each Lender may direct the order and manner of any sale of
         all or any part of any security later held for the Notes or this
         Guaranty, and each Lender may also bid at any such sale.

                  (d) Each Lender may apply any payments or recoveries from
         Obligor, Guarantor or any other source, and any proceeds of any
         security, to Obligor's obligations under the Notes in such manner,
         order and priority as each Lender may elect, whether or not those
         obligations are guaranteed by this Guaranty or secured at the time of
         the application.
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                  (e) Each Lender may release Obligor of its liability for any
         of the Notes or any part of it.

                  (f) Each Lender may substitute, add or release any one or more
         guarantors or endorsers.

         3. Guaranty to be Absolute. Except as provided in Section 11 below,
Guarantor expressly agrees that until the Notes are paid in full and each and
every term, covenant and condition of this Guaranty is fully performed,
Guarantor shall not be released by or because of:

                  (a) Any act or event which might otherwise discharge, reduce,
         limit or modify Guarantor's obligations under this Guaranty;

                  (b) Any waiver, extension, modification, forbearance, delay or
         other act or omission of any Lender, or its failure to proceed promptly
         or otherwise as against Obligor, Guarantor or any security;

                  (c) Any action, omission or circumstance which might increase
         the likelihood that Guarantor may be called upon to perform under this
         Guaranty or which might affect the rights or remedies of Guarantor as
         against Obligor; or

                  (d) Any dealings occurring at any time between Obligor and
         each Lender, whether relating to the Notes or otherwise.

Guarantor hereby expressly waives and surrenders any and all defenses to its
liability under this Guaranty based upon any of the foregoing acts, omissions,
agreements, waivers or matters. It is the purpose and intent of this Guaranty
that the obligations of Guarantor hereunder shall be absolute and unconditional
under any and all circumstances.

         4. Guarantor Waivers. Guarantor waives:

                  (a) All statutes of limitations as a defense to any action or
         proceeding brought against Guarantor by Lenders, to the fullest extent
         permitted by law;

                  (b) Any right it may have to require Lenders to proceed
         against Obligor, proceed against or exhaust any security held from
         Obligor, or pursue any other remedy in each Lender's power to pursue;

                  (c) Any defense based on any claim that Guarantor's
         obligations exceed or are more burdensome than those of Obligor;

                  (d) Any defense based on: (i) any legal disability of Obligor,
         (ii) any release, discharge, modification, impairment or limitation of
         the liability of Obligor to each Lender from any cause, whether
         consented to by each Lender or arising by operation of law or from any
         Bankruptcy or other voluntary or involuntary proceeding, in or out of
         court, for the adjustment of debtor-creditor relationships ("Insolvency
         Proceeding"), and (iii) any rejection or disaffirmance of any Note, or
         any part of it, or any security held for it, in any such Insolvency
         Proceeding;


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                  (e) Any defense based on any action taken or omitted by
         Lenders in any insolvency Proceeding involving Obligor, including any
         election to have Lenders' claim allowed as being secured, partially
         secured or unsecured, any extension of credit by Lenders to Obligor in
         any Insolvency Proceeding, and the taking and holding by Lenders of any
         security for any such extension of credit; and

                  (f) All presentments, demands for performance, notices of
         nonperformance, protests, notices of protest, notices of dishonor,
         notices of acceptance of this Guaranty and of the existence, creation,
         or incurring of new or additional indebtedness, and demands and notices
         of every kind except for any demand or notice by each Lender to
         Guarantor expressly provided for in Section 1.

         5. Waiver of Subrogation and Other Rights.

                  (a) Upon a default by Obligor on any Note, Lender in its sole
         discretion, without prior notice to or consent of Guarantor, may elect
         to: (i) compromise or adjust any Notes or any part of it or make any
         other accommodation with Obligor or Guarantor, or (ii) exercise any
         other remedy against Obligor or any security. No such action by Lender
         shall release or limit the liability of Guarantor, whom shall remain
         liable under this Guaranty after the action, even if the effect of the
         action is to deprive Guarantor of any subrogation rights, rights of
         indemnity, or other rights to collect reimbursement from Obligor for
         any sums paid to Lender, whether contractual or arising by operation of
         law or otherwise.

                  (b) Regardless of whether Guarantor may have made any payments
         to each Lender, Guarantor forever waives: (i) all rights of
         subrogation, all rights of indemnity, and any other rights to collect
         reimbursement from Obligor for any sums paid to each Lender, whether
         contractual or arising by operation of law (including the United States
         Bankruptcy Code or any successor or similar statute) or otherwise, (ii)
         all rights to enforce any remedy that each Lender may have against
         Obligor, and (iii) all rights to participate in any security now or
         later to be held by Lender for its respective Note.

         6. Revival and Reinstatement. If any Lender is required to pay, return
or restore to Obligor or any other person any amounts previously paid on its
respective Note because of any Insolvency Proceeding of Obligor, any stop notice
or any other reason, the obligations of Guarantor shall be reinstated and
revived and the rights of each Lender shall continue with regard to such
amounts, all as though they had never been paid.

         7. Events of Default. Each Lender may declare Guarantor to be in
default under this Guaranty upon the occurrence of any of the following events
("Events of Default"):

                  (a) Guarantor fails to perform any of its obligations under
         this Guaranty; or

                  (b) Guarantor revokes its Guaranty or its Guaranty becomes
         ineffective for any reason; or

                  (c) Guarantor becomes insolvent or the subject of any
         Insolvency Proceeding; or

                  (d) Guarantor dissolves or liquidates; or

                  (e) Any representation or warranty as to Guarantor (UDC) in
         the Loan Agreement is false in any material respect; or


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                  (f) Guarantor fails to execute and deliver the UDC Warrant
         Agreement or to issue the UDC Warrants pursuant to Section 2.08 of the
         Loan Agreement.

         8. Authorization; No Violation. Guarantor is authorized to execute,
deliver and perform under this Guaranty, which is a valid and binding obligation
of such Guarantor. No provision or obligation of Guarantor contained in this
Guaranty violates any applicable law, regulation or ordinance, or any order or
ruling of any court or governmental agency. No such provision or obligation
conflicts with, or constitutes a breach or default under, any agreement to which
Guarantor is a party.

         9. Additional and Independent Obligations. Guarantor agrees to perform
as required of it pursuant to Section 2.08 of the Loan Agreement for the
execution and delivery of the UDC Warrant Agreement and the issuance of the UDC
Warrants, which terms of such Section 2.08 are incorporated herein by this
reference. Guarantor's obligations under this Guaranty are independent of those
of Obligor on the Notes. Lender may bring a separate action, or commence a
separate reference or arbitration proceeding against Guarantor without first
proceeding against Obligor, any other person or any security that Lender may
hold, and without pursuing any other remedy. Lender's rights under this Guaranty
shall not be exhausted by any action by Lender until the Notes has been paid in
full.

         10. No Waiver; Consents; Cumulative Remedies. Each waiver by Lender
must be in writing, and no waiver shall be construed as a continuing waiver. No
waiver shall be implied from Lender's delay in exercising or failure to exercise
any right or remedy against Obligor, Guarantor or any security. Consent by
Lender to any act or omission by Obligor or Guarantor shall not be construed as
a consent to any other or subsequent act or omission, or as a waiver of the
requirement for Lender's consent to be obtained in any future or other instance.
All remedies of Lender against Obligor and Guarantor are cumulative.

         11. Release. Guarantor shall automatically (and without any further
action) be unconditionally and forever released from this Guaranty and its
obligations hereunder upon the occurrence of the later of (i) the Split-Up, and
(ii) the issuance of the Company Warrants pursuant to Section 2.08 of the Loan
Agreement.

         12. Successors and Assigns; Participations. The terms of this Guaranty
shall bind and benefit the successors and assigns of Lender and Guarantor;
provided, however, that Guarantor may not assign this Guaranty, or assign or
delegate any of its rights or obligations under this Guaranty, without the prior
written consent of Lender in each instance. Lender in its sole discretion may
sell or assign participations or other interests in the Notes and this Guaranty,
in whole or in part, all without notice to or the consent of Guarantor and
without affecting Guarantor's obligations under this Guaranty, provided that the
assignment or transfer of the Notes shall be in compliance with and subject to
the terms and conditions of the Loan Purchase Agreement. Also without notice to
or the consent of Guarantor, Lender may disclose any and all information in its
possession concerning Guarantor, this Guaranty and any security for this
Guaranty to any actual or prospective purchaser of any securities issued or to
be issued by Lender, and to any actual or prospective purchaser or assignee of
any participation or other interest in the Notes and this Guaranty.

         13. Notices. Any notice or other communication given hereunder shall be
in writing and shall be sent by certified mail, postage prepaid, overnight
courier or personally delivered or telecopied to Guarantor at the address set
forth on the signature pages hereto.

         14. Rules of Construction. In this Guaranty, the word "Obligor"
includes both the named Obligor and any other person who at any time assumes or
otherwise becomes primarily liable for


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all or any part of the obligations of the named Obligor on the Notes. The word
"person'' includes any individual, company, trust or other legal entity of any
kind. The word "include(s)" means "include(s), without limitation," and the word
"including" means "including, but not limited to." When the context and
construction so require, all words used in the singular shall be deemed to have
been used in the plural and vice versa. Each reference to a Note shall be the
Note held by the applicable Lender. No listing of specific instances, items or
matters in any way limits the scope or generality of any language of this
Guaranty. All headings appearing in this Guaranty are for convenience only and
shall be disregarded in construing this Guaranty.

         15. Governing Law. This Guaranty shall be governed by, and construed in
accordance with, the laws of the State of California.

         16. Costs and Expenses. If any lawsuit, reference or arbitration is
commenced which arises out of, or which relates to this Guaranty or any of the
other Loan Documents, the prevailing party shall be entitled to recover from
each other party such sums as the court, referee or arbitrator may adjudge to be
reasonable attorneys' fees (including allocated costs for services of in-house
counsel) in the action or proceeding, in addition to costs and expenses
otherwise allowed by law. In all other situations, including any Insolvency
Proceeding, Guarantor agrees to pay all of Lender's costs and expenses,
including attorneys' fees (including allocated costs for services of Lender's
in-house counsel) which may be incurred in any effort to collect or enforce the
Notes or any part of it or any term of this Guaranty. From the time(s) incurred
until paid in full to each Lender, all sums shall bear interest at the rate set
forth in Section 2.02(c) of the Loan Agreement.

         17. Consideration. Guarantor acknowledges that it expects to benefit
from the Loans to Obligor, and that it is executing this Guaranty in
consideration of that anticipated benefit.

         18. Integration; Modifications. This Guaranty (a) integrates all the
terms and conditions mentioned in or incidental to this Guaranty; (b) supersedes
all oral negotiations and prior writings with respect to its subject matter; and
(c) is intended by Guarantor and Lender as the final expression of the agreement
with respect to the terms and condition set forth in this Guaranty and as the
complete and exclusive statement of the terms agreed to by Guarantor and
Lenders. No representation, understanding, promise or condition shall be
enforceable against any party unless it is contained in this Guaranty. This
Guaranty may not be modified except in a writing signed by Lenders and
Guarantor.

         19. Miscellaneous. The illegality or unenforceability of one or more
provisions of this Guaranty shall not affect any other provision. Time is of the
essence in the performance of this Guaranty by Guarantor.

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         IN WITNESS WHEREOF, Guarantor has executed this Guaranty as of the date
first above written.

                                       UGLY DUCKLING CORPORATION, a
                                       Delaware corporation

                                          
                                       By:   /s/ Steven P. Johnson
                                       Name:     Steven P. Johnson
                                       Title:    SR VP & Secretary

                                       Address for Notices:

                                       2525 East Camelback Road, Suite 1150
                                       Phoenix, Arizona 85016
                                       Attn:    Steven P. Johnson, Esq.


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