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

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'''Bold text'''{{Dial-A-Law Blurb}}
{{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 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.


{{Dial-A-Law TOC|expanded = credit}}
==What you should know==
People often co-sign or guarantee a loan for a friend or relative without knowing what can happen. If they knew, they might not do this. This script explains:
===How co-signing and guaranteeing are different===
*the difference between co-signing and guaranteeing a loan
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.
*the different types of guarantees
*the legal result of co-signing or guaranteeing a loan


==Guaranteeing and co-signing a loan are often similar==
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.
Often, if you guarantee a loan for someone who borrows money (called the debtor), the party lending the money (called the lender or creditor) must first demand payment from the debtor, before going after you, the guarantor. But if you co-sign a loan, you are just as responsible to pay the loan back as the debtor is. So the lender or creditor can demand payment from you before, or even instead of, demanding payment from the debtor. It’s important that you review the guarantee or co-signing documents carefully before signing. These documents are often similar. As a result, guaranteeing a loan often has similar obligations and responsibilities as co-signing a loan. And if you co-sign or guarantee a loan and then the debtor can’t pay because of illness, injury, or death, you will have to pay off the loan.


==Different types of guarantees==
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.
They include:
*a specific or limited guarantee
*a continuing guarantee
*an all accounts guarantee


Before you sign a guarantee, find out what type of guarantee it is. A guarantee document may have one or more of these guarantee types.
===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.”


==Specific or limited guarantee==
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.
A specific or limited guarantee means you agree to pay (or be liable for) a certain amount for a specific thing. For example, if you guarantee a car loan for a fixed amount of $10,000, you are responsible to pay the car loan of $10,000. Or if you decide to guarantee your child’s purchase of a business, the lending seller or bank may ask you to guarantee a specific amount of the debt or limit your guarantee to a certain figure.


==Continuing guarantee==
Your responsibilities also depend on the type of guarantee you give. There are three types:
A continuing guarantee means you agree to pay a particular type of loan as long as the guarantee lasts. For example, you guarantee the operating line of credit for your spouse’s business. The line of credit may be at zero or at the maximum amount. It usually goes up and down with the cash flow and profitability of the business. But you’re responsible for everything owing until the guarantee ends and the entire debt is paid.


==All accounts guarantee==
* '''Specific or limited guarantee'''. You agree to be responsible for a certain amount for a certain thing.
An all accounts guarantee means you agree to pay any amounts the debtor owes to the lender or creditor, including amounts that you may not know about. The loan, or a line of credit agreement, may allow the debtor to borrow more, and you may be liable for any extra amounts too. You may also become liable for things called “contingent liabilities”, such as costs of the lender or creditor to collect the debt. This may include the full amount of any reasonable legal and other fees. Lending companies use this type of loan or credit agreement most often.
* '''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.


==What can happen if you co-sign a loan?==
===Co-signing a loan===
You may have to pay off the loan if the borrower doesn’t pay it. For example, if your son borrows money from a bank to buy a car and you co-sign his loan, things are fine if he makes all his payments on time. But if he can't make a loan payment, the bank will send you a demand to repay the loan. It can sue you to enforce the loan agreement. It can even garnish (or take money from) your employer and bank account without notifying you.
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 more information on garnishment, check script [[Garnishment (Script 251)|251]].
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.


==What can happen if you guarantee a loan?==
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 this car example, if you guarantee the loan instead of co-signing it, you may still have to pay the full amount. But usually the bank must first demand payment from your son before demanding it from you.


==What if you or the borrower pledge something for the loan?==
==Protect yourself==
Say your son used (or pledged) the car he’s buying as security for his car loan, with a security agreement. If he can’t make a loan payment, the bank can seize the car. If the bank does that, your son is not responsible for anything more. The bank can’t sue him after seizing the car, even if the car is worth less than the amount of the loan he still owes. But if you pledged something else as security for your son’s car loan, the bank can seize what you pledged, instead of going after your son or seizing what he pledged.
===Step 1. Ask questions before guaranteeing or co-signing a loan===


==Be careful with acceleration clauses==
Before putting yourself at risk, ask questions like:
Most loan agreements have an acceleration clause. It lets the lender or creditor demand immediate payment of the whole loan—not just the “arrears” (or missed payments)—if the borrower breaks any part of the agreement. So just one missed payment could mean you must pay the whole loan immediately.
* 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?


==Be careful about the risk of future borrowing==
===Step 2. Ask the lender to keep you informed===
A major risk if you co-sign or guarantee a loan is that you may be responsible for additional money that the debtor may borrow later. Standard loan forms make you responsible for both the loan, and any other amounts the debtor borrows from the same lender or creditor in the future (called advancements) plus their costs to collect the debt. This is true even if you don’t know anything about the debtor borrowing more. So if you co-sign or guarantee a loan, put an upper limit in the loan agreement to limit how much you could be responsible for.
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.


==Your credit rating could be harmed==
===Step 3. When the loan is paid off===
Even though the loan is made for the person you are helping, your credit rating may be harmed if the person stops paying the loan. This is usually more common if you are a co-signer, jointly responsible for the debt. Then any default on the debt can immediately harm your credit rating. With a guarantee, because the guarantor generally isn’t liable until repayment has been demanded, your credit rating may be affected only if you don’t repay the debt if the lender or creditor demands it.
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.


==You can become a guarantor even if you don’t sign anything==
==Work out problems==
Guaranteeing a loan or other debt doesn’t always need your signature. One example is a secondary credit card, where a second person gets their own card on the primary cardholder’s account. The credit card contract often says that the first time the secondary cardholder uses the card, they are guaranteeing all further debts on the credit card.


Another example involves small business loans. Often the loan agreement says that 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.
===Step 1. Consider whether you are liable===


==Before you co-sign or guarantee a loan, read the loan agreement carefully==
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.
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 or creditor require a co-signer or guarantor?
*How high is the risk that 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, get legal advice to protect yourself, especially if you’re not sure about your responsibility, or about anything else in the loan agreement. If you decide to co-sign or guarantee a loan, ask the lender or creditor 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. You should also get a copy of every document you 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.


==What should you do when the loan is paid off?==
===Step 2. Negotiate a reduced payment===
Make sure you are not still liable (required to pay) after the original loan is fully repaid. Insist that the lender or creditor return the original guarantee or loan document to you after the loan is repaid. You should also get a document clearing you of any liability for the loan or guarantee. That document could be a letter of acknowledgement, a copy of the debtor’s discharge, or a release.


==Can you stop being liable before a loan is repaid?==
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.
You can always negotiate with the lender or creditor so you are no longer liable for a loan that you guaranteed or co-signed. For example, someone else may be willing to replace you as the guarantor or co-signer. Or the debtor may have repaid most of the loan—enough to satisfy the lender or creditor. Or there may be enough other co-signors or guarantors to satisfy the lender or creditor.


==More information==
===Step 3. Negotiate to limit your liability===
See ''[http://www.legalaid.bc.ca/publications/pub.php?pub=17 Consumer Law and Credit/Debt Law]'' published by the [http://www.legalaid.bc.ca/ Legal Services Society]. This manual is for paralegals, legal information counsellors, and lawyers with clients who have consumer or debt problems.


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


[updated October 2017]
===Step 4. Make an agreement with the other borrower===


'''The above was last reviewed for accuracy by Stan Osobik and edited by John Blois.'''
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. [https://www.peopleslawschool.ca/everyday-legal-problems/money-debt/borrowing-money/co-signing-or-guaranteeing-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: [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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