In the financial terminology of debt and lending, a surety is a third party guarantee to take on the repayment obligations of a debtor in the event that the debtor is unable to repay his debt obligations. A simple example of a surety is a parent co-signing on a lease agreement for a child renting a house or an apartment. Most landlords would be unwilling to rent to an 18-year-old college student if the student's parents were not contractually obligated to back up the rent obligations. There are, of course, more complicated surety relationships involving businesses, which often include a right of subrogation.
Borrower
One of the three main parties in a surety agreement is the borrower, the party in need of the funds. In the context of a surety agreement, the borrower may have little or no credit history, or poor credit. In a business setting, the borrower may be a new business venture with virtually no collateral but with a potentially successful business model.
Lender
The lender is the party in the surety agreement providing funds. Lenders are understandably wary of lending money to risky borrowers, because there is a very real chance they will be unable to make their payments. A lender in this situation may refuse to offer the loan, or may decide to require a guarantor to contractually agree to back up the loan.
Guarantor
The guarantor is the key party in the surety relationship. So long as the lender is able to make its payments, the guarantor will have virtually no active involvement in the entire lending process
Subrogation
In the event that a borrower is unable to make its loan repayments, the law will generally allow the guarantor the right of subrogation. Subrogation gives the guarantor the right to take control of the borrower's contractual rights to recover the cost of making the borrower's payments. For example, the guarantor of a restaurant may have the right to take control of the operation of the restaurant in order to make payments on the borrower's debt.
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