What is a Surety?

Providing guarantee of debt repayment by another party, is called standing in as Surety. An individual or an organization can offer Surety for another individual or organization that’s borrowing the money, and is liable on record to step in and fulfill the obligation of debt repayment if the original borrower fails to pay the money back. The guaranteeing party is called the Guarantor or Surety.

Surety is an additional safeguard against loan defaulters. It improves lender confidence as there’s a backup person or entity who will take on the task of repaying the borrowed money if the original borrower is indisposed. It reduces the lending risk with the inclusion of the Surety in the loan contract. It also benefits the borrower by facilitating cheaper interest rates.

What is a Surety Bond?

Surety can be guaranteed by way of Surety Bonds. Its a legal contract with three main parties – the borrower, the lender, and the guarantor, also known as the principal, obligee, and the Surety respectively. 

The Surety’s guarantee is a legal bond to secure the loan for the principal from the obligee, who may or may not be a government entity. Surety is on the record stating that the principal will repay the borrowed sum to the obligee. 

The principals obligations could range from repaying loans to providing specific business services. If the principal fails to fulfill its obligations, obligee can sue them for failure to fulfill a legally entered contract and obtain damages. 

The Surety is liable to provide the necessary assistance in repairing damages, and repaying the losses incurred, along with the principal. The principal will eventually also have to repay the Surety for the guarantee damages they paid for. 

Surety is a guarantee of payment as opposed to an insurance which kicks in under different circumstances. Principal is the sole party required to repay the borrowed amount or fulfill other legal obligations of the bond, even the obligations that were fulfilled by Surety, need to be repaid with interest. It is an individual or private firm guarantee, not a bank guarantee for liabilities.

Related Topics

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• Who is a Holder of a negotiable instrument?
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• Sum Certain (Contracts)
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• What is a holder in due course?
• What are the requirements for a holder to become a holder in due course?
• Receive an instrument for value?
• Receive an instrument in good faith?
• Receive an instrument without notice of a valid defense?
• How does discharge of the Underlying Obligation affect a holder in due course?
• What is the Shelter Rule?
• Can you limit a transferee from becoming a holder in due course?
• Personal Defenses?
• Real Defenses?
• What is a Claim in Recoupment?
• What are the rights of a holder in due course if the instrument involves a consumer transaction?
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• Surety 
  
• Cosign
• Accommodation Paper Definition
• Secondary Liability
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• What is Indorser Warranty of a negotiable instrument?
• What is Presentment Warranty of a negotiable instrument?
• What is a warrantors liability for a dishonored note or draft?
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• When are the warranties of a negotiable instrument discharged?