Understanding Surety Bonds

By Ezmeralda Lee

  • Overview

    Surety bonds are an agreement between three different people. One person agrees to pay for another person, if the second person is not able to pay. This is a useful transaction for often sticky situations, such as loans, cars, and legal payments. The original concept of surety bonds were created when different countries started trading with one another. Shipping companies used them frequently. Now the most common use for surety bonds is in the construction industry.
  • Function

    The main purpose of surety bonds is to protect the interest of both parties involved in a transaction. The addition of a third person is to ensure that the exchange of money and services happens in the manner it was supposed to. The third person agrees to cover the expense of one or the other parties so that transactions run much more smoothly. Surety bonds are often used when the payment ability of the person is under question.
  • Identification

    There are many different kinds of surety bonds. Some of the most common are contract or commercial. These bonds are usually attached to the construction industry. However, they are not the only kind of surety bond. Surety bonds are often used in court exchanges, bail bonds, union agreements, taxes, auto payments, trust funds, and many other places. Any time where it is beneficial to have a third party ensure the agreement between the two main parties is carried out surety bonds are used.

  • Time Frame

    Most surety bonds last as long as money or services are still owed. If someone owes money on their car, and someone else has agreed to pay for it if the first party cannot, then the bond will transfer to the second person. However, if the car is paid off, then the bond agreement is over. Usually these agreements will last anywhere from a few months to several years, depending on the size of payment offered.
  • Considerations

    It is important to think very carefully before entering into a surety bond agreement. Whoever agrees to pay must do so if the other party becomes unable, or chooses to stop paying for any reason. If a bail bond company bails someone out of jail, then the person who was in jail has to pay them back. However, if the person becomes unable to pay the bail bond company has to pay the whole fee. Also, if the company fails, then the person who was in jail has to pay everything back to whoever the bond company owed the money to.
  • Misconceptions

    Co-signing on a loan is another kind of surety bond agreement. Co-signing is a very common practice for young people who have no credit of their own. However, that is only one type of surety bond. There are also many others. Some people think that getting into a surety bond is not that big of a deal. However, any contract where someone who didn't purchase the item is required to pay should take a lot of consideration before being agreed upon.
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