Signing for a Loan: Know the Risks, Know Your Rights
By Baalqis Hassan
FCAC is a federal government agency that protects consumers’ rights, and provides useful and objective information about financial products and services. Baalqis Hassan is a Communications Officer for the Financial Consumer Agency of Canada.
Do you have a mortgage with another person? Maybe you co-signed a loan with your child? Remember – when you sign, you are responsible.
A joint borrower has responsibilities
Together with someone else, you can sign for a credit product – maybe a loan, credit card, mortgage or line of credit. Signing makes you a joint borrower. This is a big responsibility. You and the other signer are both responsible for the debt because you are both listed in the credit agreement. The bank or lender can demand payment from either one of you – it does not need to go to the other borrower first. If the other person does not repay the money, you have to repay the debt. Maybe you trust the other person. Still, think about what would happen if they do not repay their whole debt.
A joint borrower has rights
If you co-signed a loan, you have the right to receive information about it. When you sign for a loan, the bank or lender must tell each joint borrower about the terms and conditions of the loan, including the amount of interest and other costs. In most cases it must regularly send information about the loan to each signer – for example, if the other borrower is making payments, or if the terms and conditions of the loan have changed. Say you and your son or daughter are joint borrowers on a credit card. In that case you should each receive monthly statements about the account. Even if you live at different addresses, you both have the right to receive separate copies of these important documents.
Tips for avoiding problems
Here are some tips to help you avoid problems:
- Ask for explanations. Before you co-sign, make sure you understand your responsibilities. If something isn’t clear to you, ask your bank or lender to explain.
- Stay informed. Are you regularly receiving copies of all agreements and account statements from your bank or lender? If not, ask the lender to send them to you. If there is still a problem or you want to learn more, contact the Financial Consumer Agency of Canada (FCAC) or check its information on the web.
- Get it in writing. Once the loan has been paid off, ask the lender or card issuer to state in writing that the debt has been paid in full and you are no longer responsible. If the loan is a mortgage or some other charge against your property, ask for a document called a “discharge of the mortgage” from the lender.
- Think about insurance. It’s possible to get insurance that would help repay the debt in case of an unexpected problem – maybe an accident, illness or even a sudden death. Think about asking the other borrower to buy insurance. But see that you understand exactly what the insurance costs and what it covers. To learn more about insurance on loans, visit FCAC’s website.
Co-signing may help the other borrower get a loan but it can be risky for you. Maybe the other person is someone you trust and know well. Even so, think carefully before you decide to co-sign. Ask questions. Make sure you feel comfortable about the situation. And make sure you understand your rights and responsibilities as a joint borrower.
The rules are different for a business loan. The bank or lender does not have to send copies of all the loan documents to each co-signer. The banks and the Canadian Bankers Association (CBA) have adopted a model code of conduct for dealing with small- and medium-sized businesses (SMEs) seeking credit from a bank. To read the code of conduct, go to CBA’s website at www.cba.ca/en/consumer.asp, click on “Small Business Services,” and follow the link in the sidebar to the Small Business Banking Code of Conduct.