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Simple English definitions for legal terms
guaranty
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A quick definition of guaranty:
A guaranty is a promise made by someone, called a guarantor, to pay back a debt if the person who borrowed the money, called a debtor, cannot pay it back. It's like a backup plan to make sure the creditor gets their money back. The guarantor only has to pay if the debtor doesn't pay, and the guarantor gets in trouble if they don't keep their promise. A guaranty can be part of a loan agreement, and it involves three people: the creditor, the debtor, and the guarantor.
A more thorough explanation:
A guaranty is a promise made by a guarantor to a guarantee. It is like a collateral for the primary obligation of the guarantor to perform. In finance or lending, a guarantor is responsible for the debt or default of the debtor to the creditor if the debtor fails to repay their debt. This means that a guarantor assures the future payment of another person's debt.
For example, if a person takes out a loan and has a guarantor, the guarantor promises to pay the loan if the borrower cannot. This is a form of assurance for the lender that they will receive their money back.
A guaranty involves three parties: the guarantor, the guarantee, and the debtor. The guarantor promises to pay the debt of the debtor if they cannot fulfill their obligation to repay the debt. The guarantee is the person or entity that receives the guaranty, and the debtor is the person who owes the debt.
A guaranty is not enforceable until there is a breach of contract or failure of performance by the debtor. This means that the guarantee cannot make a claim against the guarantor until the debtor fails to fulfill their obligation.
One example of a guaranty is a co-signed loan agreement. If a person takes out a loan and has a co-signer, the co-signer is a guarantor. They promise to pay the loan if the borrower cannot. This is a form of assurance for the lender that they will receive their money back.
Another example of a guaranty is a rental agreement. If a person rents an apartment and has a guarantor, the guarantor promises to pay the rent if the tenant cannot. This is a form of assurance for the landlord that they will receive their rent payment.