{"id":352561,"date":"2016-04-04T10:42:05","date_gmt":"2016-04-04T15:42:05","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/consumer\/credit-banking-finance\/what-are-surety-contracts.html"},"modified":"2024-03-04T09:38:00","modified_gmt":"2024-03-04T14:38:00","slug":"what-are-surety-contracts","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/consumer\/credit-banking-finance\/what-are-surety-contracts.html","title":{"rendered":"What Are Surety Contracts?"},"content":{"rendered":"\n
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What Are Surety Contracts?<\/h1>\n
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\n By Olivia Wathne, J.D.<\/a> | Legally reviewed by Melissa Bender, Esq.<\/a>\n | Last updated\n
\n \n <\/i>\n Legally Reviewed\n <\/summary>\n\n
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This article has been written and reviewed for legal accuracy, clarity, and style by FindLaw\u2019s team of legal writers and attorneys<\/a> and in accordance with our editorial standards<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n\n

\n \n <\/i>\n Fact-Checked\n <\/summary>\n\n
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The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n

A surety contract is a legally binding agreement in which the signee will accept responsibility for another individual’s contractual obligations. This is often a loan payment if the principal borrower falls behind or defaults. The person signing this type of contract is called a cosigner. <\/p>\r\n

While common law has distinguished cosigners (those who sign surety contracts) from guarantors<\/a>, U.S. law makes the two terms almost identical.<\/p>\r\n

Someone may sign a surety contract<\/a> to help their child obtain a car loan, start a business, or any other transaction considered by the lender to be high-risk. In many lending situations, it is a requirement for getting the loan. A surety contract can also help the borrower get a better rate.<\/p>\r\n

FindLaw’s Financial Consumer Protection<\/a> and Start-Up Financing<\/a> sections can help you with any questions on those topics.<\/p>\r\n

Surety Contracts and Risk<\/h2>\r\n

Surety contracts are intended to minimize the risk to the lender. This is because a lender would rather not spend money on collection agencies or lawyers to secure the repayment of a loan if the borrower defaults. <\/p>\r\n

Anyone asked to cosign a loan should understand their risk should the loan go unpaid. Nearly three out of four cosigners end up repaying the principal borrower’s loan, according to research cited by the Federal Trade Commission (FTC)<\/a>.<\/p>\r\n

To put it in clear and simple terms: A borrower asks a friend or a parent to cosign a loan because the lender would not otherwise give this person the loan. That alone illustrates the risks the cosigner is assuming.<\/p>\r\n

Suretyships, Surety Contracts, and Surety Bonds<\/h2>\r\n

The terms suretyship<\/a>, surety contract, and surety bond<\/a> are related but refer to different aspects of financial agreements:<\/p>\r\n