Guaranties are common in the world of banking. Often, a bank will only loan money to a borrower if someone else agrees to guarantee repayment of the loan.
In these situations, there are three parties – – the borrower, the lender, and the guarantor.
Not all guaranty agreements are equal, however. Before signing one, it is important to know the two primary types of guaranties.
Guaranty of payment
This type of Guaranty is the most favorable to the lender. When someone signs a Guaranty of payment, she is telling the lender that if the borrower does not repay the loan, the guarantor will.
With this type of guaranty, the lender does not have to “go after” the borrower first. If the borrower defaults, the lender can insist that the guarantor immediately pay.
Guaranty of collection
A guaranty that is more favorable to the guarantor is the guaranty of collection. With this type of guaranty, the lender must first pursue the borrower. Here, the lender is often required to reduce its claim against the borrower to judgment and then try to collect it before turning to the guarantor.
How to determine the type of guaranty before signing
The language of the guaranty controls the question of whether the guaranty is one of collection or payment.
To avoid any ambiguity, banks usually add the phrase “this is a guaranty of payment and not collection.”
If you are considering signing a guaranty for someone else’s loan, read our prior post here on the subject.
Panter Law Firm, PLLC, 7736 Old Canton Road, Suite B, Madison, MS 39110