A guaranty, which may otherwise be referred to as surety or spelled as “guarantee,” is the commitment of an entity to ensure that a debt or financial obligation will be met. The said entity could either be an individual, organization, or other form of agency, and is usually known as a guarantor.
Before the need for a guaranty arises, two entities must first express interest in entering a certain transaction or contract, such as the sale and purchase of a piece of property. In some situations, uncertainty regarding the ability of the buyer or borrower to fulfil his end of the deal may arise. In such a case, a guaranty may then be necessary for the transaction to proceed. This then provides the seller with the security of knowing that he will receive the payment he requires. Naturally, this puts the guarantor at a certain level of risk because of the obligation to shoulder the buyer’s financial responsibility in case of a default.
On the other hand, a guaranty fund is something which is more associated with insurance. This is a certain amount of money which is kept just in case an insurance agency or company is no longer able to meet its financial obligations. As such, if there are any claims which need to be settled, it will be possible to do so. Such a fund therefore secures policy holders from the risk of losing their money, at least to a certain extent, should their insurance company suffer from insolvency. While there may not necessarily be enough money to cover the entire amount due the policy holder, part of this can still be recovered, at the very least.
