Do you feel ready to apply for a mortgage or a loan and have you weighed up all the options? A surety bond is right for you, but you are torn between a bank surety bond and an insurance surety bond: you want to know more, which is why you are in the right place!
Now all you need to do is understand the differences in order to clear up any doubts and make the best choice. In general terms, a surety bond is a guarantee contract that involves three parties: the principal or debtor, the beneficiary or creditor, and the surety, that is, the party that guarantees payment to the beneficiary in the event of default by the principal.
It is increasingly required by Credit Institutions, especially in relation to those parties who are considered not very reliable because they are too young or have a job that offers no guarantees. The two most commonly used types of surety bond are generally the bank surety bond and the insurance surety bond. A surety bond is ancillary in nature, in the sense that it only applies when the principal is unable to fulfil their obligations towards the beneficiary.
The main features and differences
Deciding between these two surety bonds means choosing the guarantor: indeed, with a bank surety bond your surety will be a banking institution, whereas with an insurance surety bond the surety will be an insurance agency.
Other differences lie in the way you will deal with your guarantor. Let us examine the main differences between these two types of surety bond.
The Insurance Surety Bond
The insurance surety bond (also called an insurance policy) is the one in which the insurance company, as already mentioned, acts as the guarantor. It is characterised by faster turnaround times compared with the bank surety bond, it can be issued within a few days, and the issuing procedures are also simpler.
The insurance agency requests payment for the service through the payment of a “premium” in cash, which the debtor usually pays to the agency in a single instalment.
To take out the surety bond, insurance agencies usually request the payment of interest calculated on an annual basis, which in most cases ranges between 0.5% and 5%.
However, they may also include a commission, usually equal to 1% of the total amount. Failure by the debtor to pay the charges results in the termination of the contract, so the insurance agency is no longer obliged to honour its commitments.
The bank surety bond
The bank surety bond involves longer bureaucratic procedures and requires the principal to commit for the entire duration of the surety contract by freezing their assets, or part of them; this serves as a guarantee in the event that the debtor has difficulty repaying the financing.
The bank surety bond is usually better suited to large projects or to the movement of fairly large sums of money: the construction of a public work in the former case, or a mortgage in the latter.
Furthermore, obtaining bank surety bonds is more difficult than obtaining insurance surety bonds, since the bank surety bond requires the principal to deposit with the bank between 100% and 120% of the guaranteed amount, in the form of cash or assets.
If, on the other hand, the principal has an account with the same banking institution, the amount may be frozen within it. The costliness of this type of surety bond is also evident from the need to pay the bank a premium for issuing the surety bond.
To sum up
The insurance surety bond does not involve the freezing of capital, unlike the bank surety bond. This leaves the principal with greater financial freedom.
The insurance surety bond is usually less costly for the debtor. The shorter bureaucratic procedure of the insurance surety bond compared with the bank one makes it suitable for situations where it is important to find a guarantor within a tight timeframe.
For further information: all types of surety bond.