Guaranteeing/Co-Signing Loans

It is important when signing as either a co-signer or guarantee that you review both the loan agreement and the borrower’s ability to repay the loan. It is vital that you discuss with the borrower there ability to make the loan payments and request documentation to show their financial position. It may feel awkward to discuss this with family and friends but it is important to take these additional steps if you are placing yourself at financial risk by co-signing their loan. You should always consider why the borrower needs a co-signor/guarantor.

You should also review your own financial situation to determine if you could make the loan payments yourself if the borrower is unable. Having to pay an additional loan, even for a short period, could place you in financial difficulties yourself. Often co-signers/guarantors assume that if they do have to incur any costs that the borrower will reimburse them for these expenses. It is important to remember however if the borrower has been unable to meet their financial obligations under the loan agreement they may not be able to pay any costs and expenses you incur.

It is important when reviewing the loan agreement to look at the size of the deposit being paid and the total amount of the loan as compared to the property value. Different forms of property depreciate at different rates and this should be considered when entering into any loan agreement. The loan agreement should be reviewed for penalty and acceleration clauses in order to determine what amounts may potentially be owing upon default. All co-signors and guarantors should understand that the lender can potentially come after them for any short-fall in the loan and the costs incurred by the lender in collecting against the property.

A potential co-signor/guarantor should be mindful of the fact that co-signing or guaranteeing a loan can also affect their own credit score and restrict their ability to access financing in the future regardless of if the borrower defaults or not. It is important to ensure if you do decide to co-sign/guarantee a loan that you are kept aware of the loan amount and terms. Request that the lender provide you directly with monthly statements in order to known in advance of any potential issues. Often people think that they will only have to co-sign/guarantee the loan for a short time once the borrower increases their credit score. It is important to remember that unless the loan is paid off or refinanced it is at the discretion of the lender to remove a co-signor/guarantor from a loan. If signing as a co-signor/guarantor it is important to receive legal advice regarding the loan agreement as each agreement can have unique terms that may affect your decision to co-sign.