My boyfriend wants me to co-sign for his loan. Will this make me responsible if he misses a payment?
If someone has insufficient or an unreliable credit history, a lender may require that a loan have a co-signer or that someone else “guarantee” a loan. Co-signing and guaranteeing a loan are different, and if you’re considering doing either, you should consider the implications carefully.
What does it mean to co-sign a loan?
Co-signing a loan means that you and the borrower are equally and jointly responsible for the debt. If either party defaults on the payments, the lender can ask either one of you for the money. The debtor and co-signer are known as joint debtors.
If you co-sign a loan, you can’t make the borrower the only person legally responsible to pay, even if you have agreed privately that they will be responsible. The lender is not affected by your private agreement and can come after you directly for the money.
It’s a good idea to keep a copy of all the paperwork and ask the borrower to keep you up to date with information about the repayments so you always know where things stand and you don’t get surprised.
What does it mean to guarantee a loan?
If you guarantee a loan for someone, you promise to pay only if the borrower doesn’t live up to their obligation. The lender must ask the borrower for the money first before they ask you.
If you guarantee a loan, the borrower is called the principal debtor and you are the guarantor. Your responsibility for the debt only comes into play if the debtor defaults on the loan for the outstanding amount at that point.
There are different types of guarantees:
- Specific or limited guarantee
- The maximum you would have to pay if the other party defaults is the total amount of the loan.
- Continuing guarantee
- If you guarantee credit that is constantly being used, like a card with a line of credit, you will be responsible for whatever the amount happens to be when the borrower defaults.
- All-accounts guarantee
- You would be responsible for whatever amount the debtor owes, even if they borrowed more under the loan agreement.
Consider asking for an upper limit in the loan agreement, to ensure that the borrower can’t borrow more from the same lender that you don’t know about. Many standard contracts make you responsible for any other amounts the borrower borrows from the same lender in the future, even without your knowledge.
What is an acceleration clause?
Be very careful if the loan has an acceleration clause. That clause means that the lender can demand immediate payment of the entire amount of the loan if the borrower doesn’t fulfil their obligations, such as if they miss a payment.
Other considerations
Some other things to consider when deciding whether to co-sign or guarantee a loan are:
- How it might affect your credit score
- A co-signed loan will be recorded on your credit score immediately, and if the borrower is late with payments, it would impact your score. However, if the borrower pays consistently and on time, it can be a good way to build credit.
- A guaranteed loan will only be added to your credit score if you become responsible for the debt and you can’t pay. Being able to pay off the amount will not positively affect your credit score — the score only goes down if you can’t cover it.
- Your borrowing capacity
- If you think you might need to take out a loan, the debt you have co-signed or guaranteed will lower the amount a creditor will be able to loan you.
Helpful information
- Co-signing or Guaranteeing a Loan (People’s Law School): This explains what you should know if you’re considering it.
- Consumer and Debt Law (People’s Law School): This is a manual for legal advocates whose clients are having problems with consumer or debt issues.
Helpful services
- Debt and Borrowing BC (Consumer Protection BC): This information from the provincial regulator has information and tips about debt and borrowing in BC.