Question

Michelle has applied for a loan but the bank will not allow her to borrow on her own. Michelle comes to you and asks if you will sign as a co-signer on the loan. You are willing to help Michelle, but you are concerned about your obligations under the loan. What is better for you to do: be a surety or a guaranty? Naturally, the bank is concerned about being repaid. Is the bank's interest the same as yours? In other words, does the bank have a preference for you to be a surety or guaranty?

This is for Business Law and the Legal Environment Comprehensive Volume 22nd Edition chapters 32-35 and would be helpful to have references cited.

Answer 1

The key difference between surety and guaranty is that in case of guaranty, if Michelle defaults on her loan payment, the bank will first take her properties and only after it is found that her properties are not sufficient to cover the loan obligation, they will hold me liable. On the other hand, as a surety I am also primarily liable for Michelle’s debt. This means if Michelle refuses to pay (in spite of being capable of paying), then the bank will hold me liable for Michelle’s debt.

Considering the situation, it is better for me to be a guaranty.

The bank’s interest is to recover the loan and interest. Thus for them it is better if Michelle makes me surety.