Can I Get a Surety Bond to Use as Collateral for a Loan?

by Michael Wolfe ; Updated July 27, 2017

Loans issued to individuals can be split into two types: secured and unsecured. A secured loan is a loan backed by some kind of collateral. This means that if the borrower defaults on the loan, the lender is allowed to seize the collateral as compensation. In some cases, a borrower may be able to get a bonding company to provide a surety bond that acts as collateral on the debt, but this is uncommon.

Surety Bonds

A surety bond is a bond that involves three parties, all of whom have a specific role. The obligee is the party who receives the bond. The principal is the party who is being bonded. The surety is the party that guarantees the principal will fulfill certain actions. In the event that the principal does not fulfill these actions, the surety must provide the obligee compensation of some kind.

Loans

When a surety bond is used for a loan, the lender will act as the obligee and the borrower will act as the principal. In such a case, the action being bonded by the surety is the repayment of the loan in full. If the borrower defaults on the loan, the surety will provide the lender with compensation, to make up for his losses on the loan.

Loan Requirements

It is very difficult to get an obligee to issue a surety bond for a loan. There are few surety companies that provide bonds for personal loans, and it generally requires an extra step in the lending process. If a surety company is willing to bond a borrower's repayment, the borrower is probably creditworthy enough to receive an unsecured loan, which would eliminate the need for a surety bond. Otherwise, the borrower has to provide the surety company some reason why the surety company should believe the borrower will pay the money back.

Considerations

Whether a lender will even accept a bond as collateral is also an open question. Some lenders may be willing to take the guarantee of the surety as enough financial assurance that they will be paid back to make the loan. However, other lenders may make it a policy to only accept physical collateral. Therefore, the only way to know whether you can use a surety bond for a loan is to ask both the prospective lender and the prospective bonding company.

About the Author

Michael Wolfe has been writing and editing since 2005, with a background including both business and creative writing. He has worked as a reporter for a community newspaper in New York City and a federal policy newsletter in Washington, D.C. Wolfe holds a B.A. in art history and is a resident of Brooklyn, N.Y.