Difference between revisions of "Co-Signing or Guaranteeing a Loan"

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{{REVIEWEDPLS | reviewer = [https://www.icbc.com/ Stan Osobik], ICBC, and [http://www.robertslaw.ca/ Adam Roberts], Barrister & Solicitor |date= October 2017}} {{Dial-A-Law TOC|expanded = money}}
{{REVIEWEDPLS | reviewer = [https://www.carboncure.com/ Mario Garcia], CarbonCure Technologies |date= December 2019}} {{Dial-A-Law TOC|expanded = money}}
Before lending money to someone, a lender may ask for someone else to “co-sign” or “guarantee” the loan. Learn what to consider if you’re asked to co-sign or guarantee a loan.
Before lending money to someone, a lender may ask for a third party to '''co-sign''' or '''guarantee''' the loan. Learn how to protect yourself when co-signing or guaranteeing a loan — and how to deal with problems that arise.


==Understand your legal rights==
==What you should know==
===How co-signing and guaranteeing are different===
When you '''co-sign''' a loan, you and the borrower are jointly responsible for the debt. You’re both on the hook for the full amount. If one of you misses a payment, the lender can ask either of you for the money.


===How guaranteeing and co-signing are different===
When you '''guarantee''' a loan, you promise to pay the debt of the borrower if they don’t pay. Before asking you, the lender must first demand payment from the borrower.
When you '''guarantee''' a loan, you promise to pay the debt of the borrower if they don’t pay. The lender must first demand payment from the borrower before going after you.  


When you '''co-sign''' for a loan, you and the borrower agree to be jointly responsible for the debt. Each of you is independently on the hook for the loan. If the borrower doesn’t pay, the lender can demand payment from you before — or instead of — demanding payment from the borrower.  
In both cases, the lender can come after you if the borrower defaults. But if you co-sign, the lender can come ''directly to you'' for payment.


In both cases — guaranteeing a loan or co-signing for one — the lender can come after you if the borrower doesn’t pay. But if you co-sign for a loan, the '''lender can come directly to you''' for payment.  
===Guaranteeing a loan===
If a lender is nervous about providing a loan, they may ask for a '''guarantee'''. This is a promise by another person to pay the debt if the borrower can’t. The borrower is called the “principal debtor.” The person guaranteeing the debt is called the “guarantor.”


It’s important to review the guarantee or co-signing documents carefully before signing, so you know what you are committing to.  
As a guarantor, you only become responsible for the debt if the borrower defaults on an obligation. For example, by missing a loan payment. The lender must ask for payment from the principal debtor before coming to you.


===If you guarantee a loan===
Your responsibilities also depend on the type of guarantee you give. There are three types:
A lender who’s nervous about loaning someone money may ask for a '''guarantee'''. A guarantee is a promise by another person to pay the debt if the borrower doesn’t pay. The person guaranteeing the debt is the "guarantor".


====The guarantor’s responsibility for the debt====
* '''Specific or limited guarantee'''. You agree to be responsible for a certain amount for a certain thing.
As guarantor, you are the backstop. You’re responsible for the debt only if the borrower defaults on an obligation, such as missing a loan payment. The lender must ask for payment from the borrower before coming to you.
* '''Continuing guarantee'''. You agree to be responsible for a loan (or loans) for as long as the guarantee lasts.
* '''All-accounts guarantee (or unlimited guarantee)'''. You agree to pay whatever the principal debtor owes.


====The extent of your responsibility depends on the type of guarantee====
===Co-signing a loan===
Your responsibilities as a guarantor depend on what type of guarantee you give. There are three types of guarantee:
When you '''co-sign''' a loan, you and the borrower are now equal owners of the debt. You are '''joint debtors'''. If one of you misses a payment, the lender can expect it from the other. And the lender needn’t ask the borrower first. They can come directly to you.
*specific or limited guarantee
*continuing guarantee
*all-accounts guarantee


In a '''specific or limited guarantee''', you agree to be responsible for a certain amount for a specific thing. For example, if you guarantee your brother’s $10,000 car loan, you’re responsible for up to $10,000 if your brother defaults on the loan.  
For example, say you co-sign a $5,000 loan for your daughter. You are both responsible for paying back the full amount. If she misses a payment after repaying $1,000, the lender can ask you for the outstanding payments. The lender doesn’t need to ask your daughter first.


In a '''continuing guarantee''', you agree to be responsible for a loan for as long as the guarantee lasts. For example, you might guarantee a line of credit for your spouse’s business. The amount owing at any time will depend on the business’ need for money. If your spouse defaults on the loan, the line of credit could be at zero, or at its limit, or anywhere in between. You’re responsible for whatever is owing on the line of credit at the time of the default.  
Pro tip: Check the loan agreement for an '''acceleration clause'''. It lets the lender demand immediate payment of the whole loan if the borrower defaults. So one missed payment could mean the whole loan becomes due.


In an '''all-accounts guarantee''', you agree to pay whatever the borrower owes to the lender. This could include debts you don’t know about. It could include obligations created after the guarantee is signed.
==Protect yourself==
===Step 1. Ask questions before guaranteeing or co-signing a loan===
{| class="wikitable"
|align="left"|'''Tip'''
Before you sign a guarantee, find out what type of guarantee it is. A guarantee document may have one or more of these types of guarantee.
|}
===If you co-sign for a loan===
When you '''co-sign''' for a loan, you and the borrower are now equal owners of the debt. You are “joint debtors”. Each of you is independently responsible for paying back the loan. If one of you fails to make payments, the lender can expect money from the other. The lender needn’t even ask the borrower. They can come directly to you.


For example, say you co-sign a $5,000 loan with your daughter. You and she are each responsible for paying back the lender, until the full $5,000 debt is retired. If your daughter misses a payment after paying back $1,000, the lender can ask you for the outstanding payments. The lender doesn’t have to ask your daughter for payment first.
Before putting yourself at risk, ask questions like:
* Why does the lender want a co-signer or guarantor?
* How high is the risk the borrower will have trouble making payments?
* What’ll happen if you don’t sign?
* Can you afford to pay off the loan if the borrower can’t?


===If the loan has an acceleration clause===
===Step 2. Ask the lender to keep you informed===
Most loan agreements have an '''acceleration clause'''. It lets the lender demand immediate payment of the whole loan — not just the “arrears” (or missed payments) — if the borrower defaults on an obligation. So just one missed payment could mean the whole loan amount is due immediately.
Ask the lender (in writing) to keep you informed in writing of all activity on the loan. This can help you catch a problem before it’s too late.


==Prevent problems==
===Step 3. When the loan is paid off===
Once the loan is fully repaid, take steps to end your responsibility. For example, ask the lender to return the original loan document to you. Or ask for a document releasing you from all liability for the debt. This could be a letter of acknowledgment, a copy of the borrower’s discharge, or a release.


===Questions to ask before guaranteeing or co-signing a loan===
==Work out problems==
Sometimes you want (or have) to co-sign or guarantee a loan. It may be a good business deal, or it may help a family member. Before you put yourself at risk, look at the situation carefully. Ask questions like:
*Why does the lender require a co-signer or guarantor?
*How high is the risk the borrower will have trouble and you’ll have to pay the loan?
*What will happen if you don't sign?
*Most importantly, can you afford to pay off the loan if the borrower can’t?


Before you co-sign or guarantee a loan, consider getting legal advice to protect yourself.
===Step 1. Consider whether you are liable===


You should also get a copy of every document you sign.
In some cases you may not be responsible for a debt if you guarantee or co-sign a loan. For example, a lender (or borrower) can’t use force, fraud, duress or illegal means to get you to sign.


===Ask the lender to keep you informed===
The law allows certain defences for guarantors that aren’t open to co-signers. For example, if the lender and principal debtor make changes to the guarantee that are harmful to the guarantor, the guarantor may not be liable.
If you decide to co-sign or guarantee a loan, ask the lender, in writing, to keep you informed in writing of all activity on the loan. This can help you see a problem developing and correct it before it’s too late.  


===When the loan is paid off===
===Step 2. Negotiate a reduced payment===
After the loan is fully repaid, take steps to ensure your responsibility is ended. For example, ask the lender to return the original guarantee or loan document to you. Or ask for a document clearing you of any liability for the loan or guarantee. This document could be a letter of acknowledgement, a copy of the borrower’s discharge, or a release.


==Common questions==
Say you’ve co-signed or guaranteed a loan, the borrower has defaulted, and the lender is asking you to pay up. What do you do if you can’t afford it? One option is to negotiate a reduced payment. The lender may agree to release you from liability if you pay a portion of the loan.


===What if the borrower (or I) gave security for the loan?===
===Step 3. Negotiate to limit your liability===
The lender may have asked the borrower to give a '''security interest''' for the loan you guaranteed or co-signed. For example, if the loan was to help a relative buy a car, the lender may have asked for a security interest in the car. If so, and the borrower fails to make a loan payment, the lender could take (“seize”) the car. If the lender does that, the borrower is not responsible for anything more. As long as the car was used primarily for personal purposes, the lender can’t sue them after seizing the car, even if the car is worth less than the amount of the loan they still owe.


Meanwhile, if you gave a security interest for the borrower’s loan, the lender can seize what you put up as security. They can do so instead of going after the borrower or seizing what the borrower offered as security.
Consider negotiating with the lender to limit your liability for the loan. For example, the lender may agree to release you from responsibility if:


===Will I be liable for any future borrowing?===
* someone else is willing to replace you as co-signer or guarantor
A major risk if you co-sign or guarantee a loan is you may be responsible for additional money the borrower later borrows. Standard loan forms often make you responsible for the loan in question, as well as any other amounts the borrower borrows from the same lender in the future. This is even if you don’t know anything about the later borrowing. So if you co-sign or guarantee a loan, consider asking that an upper limit be included in the loan agreement, limiting how much you could be responsible for.
* the borrower has already repaid most of the loan
* there are enough other co-signers or guarantors to satisfy the lender


===Does co-signing or guaranteeing a loan affect my credit score?===
===Step 4. Make an agreement with the other borrower===
If you co-sign a loan, your credit rating may be harmed if the borrower defaults on the loan. As a co-signer, you are jointly responsible for the debt. Any default on the debt can immediately harm your credit rating.


Guaranteeing a loan won’t expose your credit rating to as much risk. A default by the borrower alone won’t affect your credit rating. Your credit rating '''will''' be harmed if the lender demands repayment from you and you don’t repay the debt.
As a guarantor or co-signer, you can make a separate contract with the other borrower. In it, you can set out what happens in the event of a default. For example, you could say that the other borrower must reimburse you for any payments you make if they default. This is called “indemnifying” you.


===Can I become a guarantor without signing anything?===
===Go deeper===
Guaranteeing a loan or other debt doesn’t always need your signature on a guarantee agreement. One example is a secondary credit card. This is where someone gets their own credit card on a primary cardholder’s account. The contract with the credit card issuer might say that by using the card, the secondary cardholder is guaranteeing all further debts on the credit card.
If you want to go further, we have more on co-signing or guaranteeing a loan. [https://www.peopleslawschool.ca/everyday-legal-problems/money-debt/borrowing-money/co-signing-or-guaranteeing-loan See our in-depth coverage of this topic].


Another example is a small business loan. The loan agreement might say the person making the agreement for the company is also personally guaranteeing the debt. No separate signature or acknowledgement is required — the one signature you make for your company also binds you personally.
==Who can help==


===Can I stop being liable before a loan is repaid?===
===Helpful agencies===
You can always try to negotiate with the lender so you are no longer liable for a loan you guaranteed or co-signed. For example, someone else may be willing to replace you as the guarantor or co-signer. Or the borrower may have repaid most of the loan — enough to satisfy the lender to let you off the hook.
This agency can help with some types of borrowing problems.
 
==Get help==
 
===In dealing with a debt collector===
'''Consumer Protection BC''' can help if you’re having trouble with a debt collector or debt collection agency.
'''Consumer Protection BC''' can help if you’re having trouble with a debt collector or debt collection agency.
:Toll-free: 1-888-564-9963
:Toll-free: 1-888-564-9963
:Web: [http://www.consumerprotectionbc.ca/ consumerprotectionbc.ca]  
:Web: [http://www.consumerprotectionbc.ca/ consumerprotectionbc.ca]  


===Legal advice===
If you get into a tricky situation co-signing or guaranteeing a loan, consider getting legal advice.
:'''Lawyer Referral Service'''
:Helps you connect with a lawyer for a complimentary 15-minute consult to see if you want to hire them.
:Call 1-800-663-1919
:[https://www.accessprobono.ca/our-programs/lawyer-referral-service Visit website]
:'''Access Pro Bono's Free Legal Advice'''
:Volunteer lawyers provide 30 minutes of free legal advice to people with low or modest income.
:Call 1-877-762-6664
:[https://www.accessprobono.ca/get-legal-help Visit website]
:'''People’s Law School'''
:See more options for free or low-cost legal help.
:[https://www.peopleslawschool.ca/options-legal-help/ Visit website]


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Latest revision as of 22:54, 16 November 2023

This information applies to British Columbia, Canada. Last reviewed for legal accuracy by Mario Garcia, CarbonCure Technologies in December 2019.
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Before lending money to someone, a lender may ask for a third party to co-sign or guarantee the loan. Learn how to protect yourself when co-signing or guaranteeing a loan — and how to deal with problems that arise.

What you should know

How co-signing and guaranteeing are different

When you co-sign a loan, you and the borrower are jointly responsible for the debt. You’re both on the hook for the full amount. If one of you misses a payment, the lender can ask either of you for the money.

When you guarantee a loan, you promise to pay the debt of the borrower if they don’t pay. Before asking you, the lender must first demand payment from the borrower.

In both cases, the lender can come after you if the borrower defaults. But if you co-sign, the lender can come directly to you for payment.

Guaranteeing a loan

If a lender is nervous about providing a loan, they may ask for a guarantee. This is a promise by another person to pay the debt if the borrower can’t. The borrower is called the “principal debtor.” The person guaranteeing the debt is called the “guarantor.”

As a guarantor, you only become responsible for the debt if the borrower defaults on an obligation. For example, by missing a loan payment. The lender must ask for payment from the principal debtor before coming to you.

Your responsibilities also depend on the type of guarantee you give. There are three types:

  • Specific or limited guarantee. You agree to be responsible for a certain amount for a certain thing.
  • Continuing guarantee. You agree to be responsible for a loan (or loans) for as long as the guarantee lasts.
  • All-accounts guarantee (or unlimited guarantee). You agree to pay whatever the principal debtor owes.

Co-signing a loan

When you co-sign a loan, you and the borrower are now equal owners of the debt. You are joint debtors. If one of you misses a payment, the lender can expect it from the other. And the lender needn’t ask the borrower first. They can come directly to you.

For example, say you co-sign a $5,000 loan for your daughter. You are both responsible for paying back the full amount. If she misses a payment after repaying $1,000, the lender can ask you for the outstanding payments. The lender doesn’t need to ask your daughter first.

Pro tip: Check the loan agreement for an acceleration clause. It lets the lender demand immediate payment of the whole loan if the borrower defaults. So one missed payment could mean the whole loan becomes due.

Protect yourself

Step 1. Ask questions before guaranteeing or co-signing a loan

Before putting yourself at risk, ask questions like:

  • Why does the lender want a co-signer or guarantor?
  • How high is the risk the borrower will have trouble making payments?
  • What’ll happen if you don’t sign?
  • Can you afford to pay off the loan if the borrower can’t?

Step 2. Ask the lender to keep you informed

Ask the lender (in writing) to keep you informed in writing of all activity on the loan. This can help you catch a problem before it’s too late.

Step 3. When the loan is paid off

Once the loan is fully repaid, take steps to end your responsibility. For example, ask the lender to return the original loan document to you. Or ask for a document releasing you from all liability for the debt. This could be a letter of acknowledgment, a copy of the borrower’s discharge, or a release.

Work out problems

Step 1. Consider whether you are liable

In some cases you may not be responsible for a debt if you guarantee or co-sign a loan. For example, a lender (or borrower) can’t use force, fraud, duress or illegal means to get you to sign.

The law allows certain defences for guarantors that aren’t open to co-signers. For example, if the lender and principal debtor make changes to the guarantee that are harmful to the guarantor, the guarantor may not be liable.

Step 2. Negotiate a reduced payment

Say you’ve co-signed or guaranteed a loan, the borrower has defaulted, and the lender is asking you to pay up. What do you do if you can’t afford it? One option is to negotiate a reduced payment. The lender may agree to release you from liability if you pay a portion of the loan.

Step 3. Negotiate to limit your liability

Consider negotiating with the lender to limit your liability for the loan. For example, the lender may agree to release you from responsibility if:

  • someone else is willing to replace you as co-signer or guarantor
  • the borrower has already repaid most of the loan
  • there are enough other co-signers or guarantors to satisfy the lender

Step 4. Make an agreement with the other borrower

As a guarantor or co-signer, you can make a separate contract with the other borrower. In it, you can set out what happens in the event of a default. For example, you could say that the other borrower must reimburse you for any payments you make if they default. This is called “indemnifying” you.

Go deeper

If you want to go further, we have more on co-signing or guaranteeing a loan. See our in-depth coverage of this topic.

Who can help

Helpful agencies

This agency can help with some types of borrowing problems. Consumer Protection BC can help if you’re having trouble with a debt collector or debt collection agency.

Toll-free: 1-888-564-9963
Web: consumerprotectionbc.ca

Legal advice

If you get into a tricky situation co-signing or guaranteeing a loan, consider getting legal advice.

Lawyer Referral Service
Helps you connect with a lawyer for a complimentary 15-minute consult to see if you want to hire them.
Call 1-800-663-1919
Visit website
Access Pro Bono's Free Legal Advice
Volunteer lawyers provide 30 minutes of free legal advice to people with low or modest income.
Call 1-877-762-6664
Visit website
People’s Law School
See more options for free or low-cost legal help.
Visit website
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