A cosigned loan is one of the most dangerous financial agreements that you can enter into. This is like you are signing in to allow someone that is less creditworthy than you are to borrow money so you can pay it for them. In most cases, in fact, that is what happens.
To co-sign a loan is dangerous because not only will you be putting your credit history in danger, you will also be jeopardizing your relationship with the person you are co-signing for. Your intentions may be good, but it does not always end well.
According to the Consumer-Action.org, 90% of private student loans in 2011 were co-signed by either the parent or the grandparent. This is according to the report from the CFPB (Consumer Financial Protection Bureau). The reason for this is because students do not have their own income yet. The private lending companies ask for more qualifications to protect themselves from borrowers who will end up not paying them back.
But while cosigned loans can protect lending companies, it does nothing to protect the cosigner. It is like opening a door for financial disaster to come in. You should avoid this at all cost.
5 ways to remove your name from a loan your cosigned
But if you are placed in a situation in the past that got you to sign into this agreement, there are ways that will allow you to remove your name from the cosigned loan. Some of them might involve making certain payments but others, if you do them correctly, might end up freeing you for no cost. The latter is also possible if the one your co-signed for will cooperate.
There are 3 options to get out of a cosigned non-revolving debt and 2 options to remove your name from a revolving debt. Let us begin with the former.
Non-revolving debts
When we say non-revolving debts, these include personal debts, mortgage, car loans, student loans, etc. This is also debt that you only apply for once. It usually involves a high amount so you need to be careful with this. Here are the three ways that you can use to get out of this responsibility.
- Ask for a cosigner releases. There are some loans that will allow the cosigner to be released from their obligation after some time. Usually, the measure of this will depend on the payment behavior of the primary borrower. The norm is paying the monthly contributions on time for the past 24 months. You may want to review the loan documents to make sure this is an option for you. If there is none indicated, you may want to get in touch with the creditor or the lender. You might be able to come up with an agreement that will allow you to get a cosigner release.
- Refinance or consolidate the debt. This second option requires the cooperation of the primary borrower. If you only have one debt, it may be possible to refinance the original debt. If the payments for the loan had been good, this can build up the credit history of the borrower. That means the next loan that he or she will apply for does not require a cosigner anymore. But if the debt involves more than one debt, you can opt to consolidation the debt into one payment. You can talk to the borrower you cosigned for and ask them to consolidate the debt under their name this time. You can explain that debt consolidation is one way to pay off a debt with lower monthly contribution and can possibly give them a lower interest rate too.
- Sell off the collateral. This option is only applicable to those who cosigned for secured loans. If the original borrower is not paying the monthly amortization of their mortgage or car, then you can opt to sell off that collateral so you can use it to pay off the cosigned loan.
Revolving debts
The second type of debt that you may have cosigned to are credit cards. This is a popular arrangement between parents and student or between spouses with only one income. According to Kiplinger.com college students used to be able to qualify for a credit card easily. As long as they know how to sign their name, this is something that they can apply for and be approved to own. However, when the Credit Card Reform Act was passed, tighter rules on student credit card applications were enforced. Now, students have to be evaluated to prove that they can pay off their own bills.
This is one cosigned loan that is understandable for you to get into. In case you want to get out of cosigning a revolving debt, you have to make sure that there is no balance on the card. Otherwise, the creditor will not agree to remove your name from the card ownership and you will continue to be liable for any purchases that will be made on it. You have two options for this.
- Use balance transfer. If the original borrower already got themselves adequate credit history, it may be possible for you to ask them to apply for a new credit card that is only under their name. Then, you can transfer the balance on the cosigned credit card to that new account. That will free you from being responsible for any purchases made by the one you cosigned for.
- Make payments towards the account. If the amount is not yet big and you have the extra money anyway, you can opt to pay off the debt yourself. Then, close off the account and let the other owner open their own credit card account. If the amount is big, you may want to ask the one who made the purchase to pay it off. Or you can pay it off yourself then have them pay you back. While this seems unfair, this is the only way that you can avoid putting more strain on your credit score.
How to avoid cosigning a loan
Dave Ramsey, noted financial guru pointed out some interesting truths about a cosigned loan. In an article published on his website, DaveRamsey.com, he said that lenders only require cosigners when the primary borrower is not creditworthy. When there is a high chance that the borrower will run off without paying them, lenders will require them to look for a cosigner who will equally be responsible for paying off the debt.
He also mentioned that people only get into this situation because of emotions. After all, you will never agree to cosign a loan if you do not know a person deeply. But even that makes this situation wrong. You have a high chance of destroying your relationship with a person by agreeing to co-signing their loan. Not only that, you are increasing the chances of completely ruining your credit score.
If someone close to you approaches you for financial help and this is what they are asking you to do, politely decline and do the following.
- Try to help them figure out why they cannot get a loan on their own. It may be because of a bad credit record or a thin credit history. Identify the reason for the need to co-sign the loan. If they have a habit of not paying, then declining to cosign should not make you feel bad.
- Come up with a plan to improve what is causing them to be un-creditworthy. You can help them build up their credit history by suggesting that they apply for a secured credit card or something similar. You can also help them improve their credit report.
- Help them boost their financial literacy. In most cases, people who have problems with getting a loan because of a bad credit history also have poor financial literacy skills. You may want to help educate them so they know what to do with their money next time.