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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:
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.
*the difference between co-signing and guaranteeing a loan
*the different types of guarantees
*the legal result of co-signing or guaranteeing a loan


==Guaranteeing and co-signing a loan are often similar==
==Understand your legal rights==
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==
===How guaranteeing and co-signing are different===
They include:
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.
*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.
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.  


==Specific or limited guarantee==
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.  
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==
It’s important to review the guarantee or co-signing documents carefully before signing, so you know what you are committing to.  
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==
===If you guarantee a loan===  
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.
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".


==What can happen if you co-sign a loan?==
====The guarantor’s responsibility for the debt====
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.
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.


For more information on garnishment, check script [[Garnishment (Script 251)|251]].
====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


==What can happen if you guarantee a loan?==
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 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?==
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.  
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.


==Be careful with acceleration clauses==
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.
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.
{| 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.  


==Be careful about the risk of future borrowing==
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.  
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.


==Your credit rating could be harmed==
===If the loan has an acceleration clause===
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.
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.


==You can become a guarantor even if you don’t sign anything==
==Prevent 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.
===Questions to ask before guaranteeing or co-signing a loan===
 
==Before you co-sign or guarantee a loan, read the loan agreement carefully==
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:
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?
*Why does the lender 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?
*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?
*What will happen if you don't sign?
*Most importantly, can you afford to pay off the loan if the borrower can’t?
*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.
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.


==What should you do when the loan is paid off?==
===Will I be liable for any future borrowing?===
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.
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: [http://www.consumerprotectionbc.ca/ consumerprotectionbc.ca]


==Can you stop being liable before a loan is repaid?==
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.




[updated October 2017]
[updated October 2017]


'''The above was last reviewed for accuracy by Stan Osobik and edited by John Blois.'''
'''The above was last reviewed for legal accuracy by [https://www.icbc.com/ Stan Osobik], ICBC, and [http://www.robertslaw.ca/ Adam Roberts], Barrister & Solicitor.'''
 
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