Co-Signing or Guaranteeing a Loan (No. 248)

From Clicklaw Wikibooks

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.

Understand your legal rights

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. 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 — 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.

It’s important to review the guarantee or co-signing documents carefully before signing, so you know what you are committing to.

If you guarantee a loan

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

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.

The extent of your responsibility depends on the type of guarantee

Your responsibilities as a guarantor depend on what type of guarantee you give. There are three types of guarantee:

  • 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.

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.

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.

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.

If the loan has an acceleration clause

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.

Prevent problems

Questions to ask before guaranteeing or co-signing a loan

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.

You should also get a copy of every document you sign.

Ask the lender to keep you informed

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

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

What if the borrower (or I) gave security for the loan?

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.

Will I be liable for any future borrowing?

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.

Does co-signing or guaranteeing a loan affect my credit score?

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.

Can I become a guarantor without signing anything?

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.

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.

Can I stop being liable before a loan is repaid?

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.

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.

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


[updated October 2017]

The above was last reviewed for legal accuracy by Stan Osobik, ICBC, and Adam Roberts, Barrister & Solicitor.



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