What is the promise called where one party agrees to pay a debt or fulfill an obligation if the original party fails to do so?

The correct answer is the term "guaranty." A guaranty is a legal promise made by one party, known as the guarantor, to assume responsibility for the financial obligation or debt of another party, the principal debtor, in the event that the principal debtor fails to meet their obligations. This type of agreement provides additional security to the creditor, as it ensures that if the original borrower defaults, the guarantor will step in to make the payments, fulfilling the obligation.

Understanding the nuances between different financial terms can be important. For example, while a surety also involves a third party agreeing to fulfill a duty if the original party defaults, it generally requires a more formal bond and often includes additional obligations compared to a guaranty. An indemnity involves a promise to compensate for a loss or damage incurred, not necessarily tied directly to a debt obligation like a guaranty. Collateral agreements involve securing a loan with an asset but do not guarantee repayment if the debtor defaults in the same way that a guaranty does.