Area of Law: Consumer Law
Answer # 812
Co-signing or guaranteeing a loanRegion: Ontario Answer # 812
Banks and other financial lenders will often require someone other than the borrower to cosign or guarantee the loan. Although many people are familiar with the practice of co-signing or guaranteeing loans, people are often unaware of the legal consequences.
Co-signing for a loan
If you co-sign a loan for someone, such as your child or your spouse, you are equally responsible for the repayment of the loan. This means that the lender can demand payment from you before, instead of, or after approaching the borrower.
Guaranteeing a loan
On the other hand, if you guarantee a loan for someone else, the bank or other lender must first demand payment from the borrower before asking the guarantor. Despite this difference, both co-signers and guarantors are equally responsible for the full amount of the loan if the original borrower does not repay the loan. If you have signed a continuing guarantee, you may even be legally responsible for all future loans taken out by the borrower.
Co-signing or guaranteeing a loan can have major financial consequences. It can cost you money and affect your own credit rating. To better protect yourself, you should have a lawyer review the agreement before you sign it. You may also want to ask the lender to keep you informed of all activity on the loan account.
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