Bob needs a loan to remodel his home. The bank is requiring Bob to obtain some f

ID: 2771391 • Letter: B

Question

Bob needs a loan to remodel his home. The bank is requiring Bob to obtain some form of additional reassurances. Bob comes to you for assistance. You have always considered Bob to be a fair and responsible man and are willing to help him, but you wish to protect yourself from liability as much as possible. Would you prefer a surety or a guaranty? The bank issuing the loan also wishes to protect itself as much as possible. Would the bank prefer a surety or guaranty? If your oral assurances are enough to solidify the loan, has a surety or guaranty been formed?

Explanation / Answer

Guarantee and Surety both are third party assurance of payment of debt. The person who is lending the money called obligee. The person who is borrowing the money is called principal.

Guarantee

Surety

Guaranty is a contract under which guarantor agrees to pay a debt or obligation of other person when that other person fails to do so.

Surety is an undertaking under which one person agrees to pay a debt or obligation of other person when that person fails to repay the same.

Guaranty is like a collateral

Surety is like original promissory undertaking.

Guarantor is the insurer of solvency of the debtor. Guarantor undertakes to pay if the principal, that means if he becomes insolvent.

The surety is the insurer of debt. The surety undertakes to pay if the principal does not.

Contract of guarantor is his separate undertaking, in which the principal does not join. It is done before or after the principal contract with lender.

A surety is usually bound with his principal by the same instrument executed at the same time. He is the original promisor and debtor from the beginning.

Original contract of the principal is not guarantor’s contract.

Principal contract and surety contract is same.

The guarantor is not bound to take notice of the non - performance of principal.

The surety is bound to take notice of non- performance of principal.

Therefore from my point of view executing guaranty bond is better as I have to pay only when Bob becomes insolvent. Guaranty is also preferred by bank because he gets assurance for repayment of debt if the original principal becomes insolvent.

Oral assurance is not good for health of finance industry. Hence oral assurance needs to be avoided to protect the health of financial organisation as they play very crucial role in the economy of a country.