When a person lends money from another person or a firm i.e. bank or Loan Company, he is required to provide some kind of guaranty to ensure the creditor that he will pay back the debt according to the payment schedule. For this purpose, usually a third person or party is involved in the process and it’s known as the guarantor. A guarantor signs the loan agreement with the debtor and agrees to pay on behalf of the debtor if he denies paying back the debt.
Brief description of Guaranty Note:
You can understand the guaranty note by assuming that you lend some money to your friend and as there is no collateral involved, there are good chances that even if he states to return the money, he won’t pay back his debt due to some reasons. This is why it is really important to sign a legal document also known as guaranty note so that the creditor can force the debtor to pay back his debt or inform him before taking any legal action if he denies to pay his debt.
Types of Guaranty Notes:
- Bank guaranty:
When a debtor involves a bank as the guarantor, this is known as the bank guaranty. If for any reason the debtor can’t pay back the debt, the bank is responsible to payback the debt.
A sworn statement is included in the debt agreement by the debtor that states the debtor has borrowed money from the creditor for a specific period of time and he is willing to pay back the debt within the duration.
- Letter of credit:
Here the debtor is required to submit particular documents about his salary or income that proves that he will pay back the debt.
- Documentary guaranty:
This includes a written and signed agreement between the creditor and/or debtor and a third person as the guarantor.
Advantages and disadvantages of using Guaranty Note:
There are many advantages and benefits of using guaranty note for loan and mortgage purposes but it also has some disadvantages too. The most important benefit of guaranty note is that it allows the borrower to borrow money from a person or a bank without good relationship between them. When a guaranty note is included in the process, there is no need to provide the creditor with any additional documents and another huge benefit of using this note is that there is no need for the debtor to pledge his property as collateral with the creditor when a guaranty note is included with the loan agreement.
On the other hand the guaranty note also has some setbacks and flaws. For example, if a debtor declares bankruptcy and the court legalize it, there is no way for the creditor to get his money back because even if a guaranty note is included, it is still an unsecured loan. When a third person or party i.e. bank is involved in the process as the guarantor, the biggest liability for the guarantor occurs when the debtor denies to pay back the debt and the guarantor is legally obligated to pay the debt on debtor’s behalf.
Here is preview of a Free Sample Guaranty Note created as free fillable PDF form,
Here is download link for this Guaranty Note,