A surety or guaranty, in finance, is a promise by one party (the guarantor) to assume responsibility for the debt obligation of a borrower if that borrower defaults. The person or company that provides this promise, is also known as a surety or guarantor.
The situation in which a surety is most typically required is when the ability of the primary obligor or principal to perform its obligations to the obligee (counterparty) under a contract is in question, or when there is some public or private interest which requires protection from the consequences of the principal's default or delinquency. In most common law jurisdictions, a contract of suretyship is subject to the statute of frauds (or its equivalent local laws) and is only enforceable if recorded in writing and signed by the surety and the principal.
If the surety is required to pay or perform due to the principal's failure to do so, the law will usually give the surety a right of subrogation, allowing the surety to "step into the shoes of" the principal and use his (the surety's) contractual rights to recover the cost of making payment or performing on the principal's behalf, even in the absence of an express agreement to that effect between the surety and the principal.
Traditionally, a distinction was made between a suretyship arrangement and that of a guaranty. Both involve lending added credit and credibility to a loan of money. However, the surety's liability was joint and primary with the principal, whereas the guarantor's liability was ancillary and derivative. That just means that a creditor must first attempt to collect the debt from the debtor before looking to the guarantor for payment. With a suretyship, the creditor may attempt to collect the debt from either. Many jurisdictions have abolished this distinction.
In the United States, under Article 3 of the Uniform Commercial Code, a person who signs a negotiable instrument as a surety is termed an accommodation party; such a party may be able to assert defenses to the enforcement of an instrument not available to the maker of the instrument.
In the United Kingdom the idea of a loan with a guarantor has been popularised over the last 3 years. Guarantor loans open a unique type of unsecured loan, which is not based on the credit history of the borrower. In fact it is quite the opposite, this loan is based on the credit standing of the person who will guarantee the payment of the loan in case the borrower defaults. Certain circumstances lead to a reduction of credit rating. Whenever a credit rating reduces and becomes poor it will not be very easy to obtain even a high rate bad credit loan. Having a guarantor will address the lender’s concern, and is a great way to regain the lost credibility in terms of obtaining credit.[1][2]