Promissory Note vs. Personal Guaranty

A promissory note is a legal document signed by a debtor who promises to pay a debt in a form and manner as described in the document. A personal guaranty, as defined at businessdictionary.com, is an “agreement that makes one liable for one’s own or a third party’s debts or obligations.”

According to expertlaw.com, a promissory note is "a written promise to repay a loan or debt under specific terms, usually at a stated time, through a specified series of payments, or upon demand." These payments are not the responsibility of a person who executes a personal guaranty, until or unless the terms of a promissory note are violated.

While a personal guaranty is frequently required for a personal or business loan, banks often require a borrower, who might otherwise not be able to obtain a loan, to provide a third party as a guarantor (cosigner) before lending.

A personal guaranty will normally not be reported to a credit bureau, as the payment history on the loan guaranteed is reported against the debtor. If a guarantor is required to pay a debt after default of the debtor, that could change. The guarantor is usually required to immediately pay any remaining loan balance, plus overdue fees, interest and collection costs. If payment is not made, a note holder can obtain a legal judgment against the guarantor and garnish his income or seize his assets, if necessary, to obtain the money owed. These actions can negatively affect the credit rating of the guarantor.

Many people are asked to guarantee a loan -- a student loan, for example -- for a family member, while others are asked to help out a friend. These loans represent the most risk to someone offering a guaranty, as the guarantor is not the recipient of any of the proceeds of the original loan. Such loans, however, commit the guarantor to pay that money back if the original debtor can't.

While a personal guaranty of a loan made for your own benefit is normal -- and usually required -- before a bank will lend money, signing on behalf of a third party is very risky and should only be done if the guarantor has some sort of interest in the business or personal affairs of the debtor.