What is the term for a promise by one party to pay a debt or perform an obligation if another party fails to do so?

The term that describes a promise by one party to pay a debt or fulfill an obligation if another party fails to do so is known as a guaranty. This financial agreement provides security to the lender or creditor, as it ensures that they will be compensated by the guarantor in case the primary borrower defaults on their obligations.

In practice, this means that if the original borrower does not meet their payment obligations, the guarantor must step in and take responsibility for that debt. This is a crucial concept in lending and mortgage practices, as it adds an extra layer of security for lenders, encouraging them to extend credit to borrowers who may otherwise be considered risky.

Other terms, while related to financial agreements, refer to different concepts. A performance bond is usually related to construction contracts, guaranteeing that a contractor will complete a project according to specified terms. An indemnity agreement involves one party compensating another for certain damages or losses, which does not specifically pertain to the promise to pay a debt. A collateral agreement involves providing an asset as security for a loan, rather than an assurance of payment in the event of default. Understanding these distinctions helps clarify the role each term plays in financial agreements.