In general, we can define a security as the commitment to ensure that a purchased obligation is fulfilled. The guarantor, who is the person who undertakes to perform the obligation, may be one of the persons who have acquired the obligation or a third party. In the event that one of the parties to the contract fails to fulfill its obligations, the guarantor is responsible for the performance of the obligation. In this case, the guarantee provides greater assurance that the obligation will be fulfilled, which makes many loan transactions cheaper because the risk is greatly reduced by the existence of a guarantee.
We also call collateral the property or assets that are provided to secure the payment of an obligation
It is much easier to understand with some examples
- Collateral as a good or goods: When a person requests a loan from a bank, the bank may require that as collateral a good be provided that can be liquidated in the event that the person does not pay the loan. In this case the collateral is also called Collateral.
- Collateral as a commitment:
- In the same case as above, if a person borrows money from a bank, a third party can guarantee the repayment of the loan, to the extent that if the debtor does not meet his obligation, the guarantor will do so.
- Another example of this type of guarantee is the case in which a consumer buys a product and the seller guarantees the functioning of the product, i.e., in case of failure, within a certain period of time, it must be replaced or substituted.