There are a lot of good reasons to refuse a request to cosign a loan. For example, studies of certain types of lenders have found that for cosigned loans that go into default, as many as three out of four cosigners are asked to repay the loan. But what do you do if you’ve already cosigned and regret your decision? For starters, you can take comfort in the fact that you are not alone. One of the most common questions to our advice column is: “how can I get my name off of this loan?” Unfortunately, my answer is not the one people are hoping to hear.
There is no simple way to “remove” your name from a cosigned loan. The signed loan contract is all the lender needs to hold you responsible. Think of it this way: if you were lending money, would you want one or two people responsible for its repayment?
If you find yourself in the position of cosigner, there are two things you should do to protect yourself and your credit.
-First, treat the loan like you would any other business matter. Discuss the terms of the agreement with the other borrower and put the details in writing. Be sure to list both parties involved, who is responsible for making payments, and the process for dealing with financial problems such as late or missed payments. Also, make sure to document the date and time of any letters or phone calls regarding the debt.
-Next, vow to take an active role in account’s management. Most lenders offer online account management tools making monitoring the account an easy (and necessary) task. The FTC also suggests that you ask the lender to agree, in writing, to notify you if the other borrower misses a payment. That will give you time to deal with the problem or make back payments without having to repay the entire amount immediately.
If the situation becomes uncomfortable, you might also consider taking some tougher actions. Fortunately, there are a few ways to relieve you of the responsibility. Unfortunately, none of them are simple.
-Sell the cosigned item to pay off the loan. If the loan you cosigned is secured by something like a car or a home, it may be possible to sell the item to repay the loan. Then, the other borrower can replace the item on his own. This option is complicated by the fact that cosigning and ownership are two separate issues, so you will have to research your rights. In addition, this may only be an option if you are not upside down on the loan.
-Ask the cosigner to refinance the debt in his own name. In order for the other borrower to assume total responsibly for the debt, he would have to apply for a new loan and qualify on his own. The challenge is that if he were able to do this, he probably wouldn’t have asked you to cosign in the first place.
-Ask the other borrower if there is any way he can repay the debt. Suggest that the other borrower sell assets or obtain another type of loan to repay the debt. If a total repayment is impossible, discuss options that will allow for accelerated debt payoff.
-Make the payments yourself. Making the payments yourself can protect you from surprises like late fees or damage to your credit report. Then, you can try to collect from the cosigner.
Risk of Cosigning a Loan
I realize that some of these options are difficult; however, when you consider the consequences, they might be worth the effort. Besides damaging a relationship and your credit history, it is possible for a cosigner to be sued for an increased amount including late charges or attorneys’ fees. Depending on state laws, this could result in the garnishment of your wages or bank accounts. If the primary borrower files for bankruptcy, the loan may end up being your sole responsibility.
While this all seems very doom and gloom, you can rest assured that people who ask you to cosign are not necessarily trying to take advantage of you. Most people have good intentions. For example, one reason he may have needed a cosigner is to build his credit history so that he is able to qualify on his own in the future.
Next time, instead of cosigning, try being armed with alternative credit building techniques. The best part is that they have nothing to do with you. You can suggest that he:
-Get a secured credit card. When a deposit is made into a savings account, the card issuer will use it to secure a line of credit. The company then issues a card and a line of credit for at least the amount of the deposit.
-Save some money. Everyone knows that it is easier to qualify for a loan when the borrower has a large down payment.
-Be an authorized user. An authorized user is someone who has permission to use another person’s credit account. They are not responsible for the account’s repayment and they are not able to make changes to the account. The primary borrower retains all control over the account and can add or remove users as they see fit. This provides a safety net for the primary borrower since they have the ability to monitor the account and can quickly detect any problems.
-Get a prepaid credit card. This is just what it sounds like. The prepaid card is becoming popular for parents whose children "need" credit.
Speaking of kids who "need" credit, there’s been more talk about cosigning lately due to the fact that the recently passed CARD Act requires a person less than 21 years of age to either document their ability to repay the debt, or have a cosigner before being granted credit. For more on this subject, read Is a credit card a must for college students?