Co-signing a debt for someone is a generous thing which can also turn dangerous, especially when the original borrower defaults.
According to a study done by the Federal Trade Commission, 75% of the co-signers end up paying up the whole amount of the borrowed loan. This is quite a large number considering that most of the co-signers end up in losses for directly helping others out.
A cosigner is a person who guarantees a loan to someone with no credit history, who has bad credit or doesn’t have an income at all. Most lenders consider it quite risky to lend such borrowers, and that’s where the co-signer becomes essential. So, when you co-sign for your friend, you are merely promising to pay the debt on their behalf should they fail to do so.
If you no longer want to be a co-signer, the following ways will get you out:
If it’s possible for the borrower to be approved, he or she has the option of transferring the remaining loan debt or credit card to a transfer credit card. In most cases, these cards hold a 0% APR period of up to 18 months. This period, the borrower can clear off the debt without incurring any interest. Thus, however, a 3% to 5% transfer fee of the transfer amount, although some cards don’t charge any fee for the transfer.
Most lenders, especially the ones which deal with student loans, have an option of releasing the loan for the cosigner. The release may be achieved after several on-time payments as well as a credit background check for the borrower. Some borrowers don’t allow the borrowers to know if they can get the release, and it’s, therefore, crucial for the borrowers to look for that information themselves.
Consolidating means replacing the already exiting many obligations with one new debt (usually a personal loan), which has better terms and conditions. Refinancing, on the other hand, involves replacing the old loan with another one whose terms are favorable. Since both need a new name, your name will not be included in the new one if the borrower decides to either refinance or consolidate the loan.
You can remove your name from the credit card if the borrower has decent credit, and if the is no balance on the account. To do this, call the original borrower and the issuer as well and request for this option.
This only applied to the secured debts. If the original borrower isn’t able to make the repayments, encourage them to sell of the asset used as the security. If its value is high enough, they will pay off the amount and get a balance in their account. However, keep in mind that you cannot force the borrower to sell off the assets. You don’t co-own the asset, and you are therefore not legally allowed to help them make decisions on it.
This is the last option. If the original borrower fails to pay, you have no other choice than to pay it off to have your name cleared off. Remember that the debts can affect your credit history, and it might be therefore the right time to accept the loss, and then avoid co-signing with that person again in the future.
If you successfully manage to get yourself out from the deal, consider these before you get in another agreement:
Most of these options only get rid of the debt but leave the original debt account open. To be on the safe side, make sure that the borrower closes the account since you will be held legally responsible when the account is rerun.
1 Federal Trade Commission “Co-signing a Loan” https://www.consumer.ftc.gov/articles/0215-co-signing-loan
2 BankRate “What Are My Rights as a Co-signer” https://www.bankrate.com/loans/personal-loans/loan-co-signer-what-are-my-rights/
For Adrian, it’s all about helping others make the right decisions when it comes to finances. He does this on a regular basis in his profession as a financial advisor. The expertise he imparts came from years of experience as well as a successful academic career at the highly acclaimed Georgetown University’s McDonough School of Business.