If you are involved in a cosigned loan, you might be in more trouble than you thought. At least if it involves student loans. A report revealed that parents who cosigned the student loans of their children are in trouble. More than half of student loan cosigners believe that their credit scores have been negatively affected by the debt. Not only that, 3 out of 10 cosigners admitted to regretting their decision already.
While it may seem like you are helping someone, being a cosigner actually puts you at a disadvantage. You do not benefit from the loan in any way because you are not the primary borrower. But despite that, you get full responsibility for the loan. At least, if the primary borrower fails to pay it off. You will be responsible for paying it back. If you fail, the lender or debt collector can come after you for payment. It can end up leaving a negative taint on your credit report.
A cosigned loan is actually one of the financial mistakes that can end up haunting you in the future. This is why you need to stay away from it. You should never agree to cosign a loan – if you can. But if you were naive enough to get involved in one, that is okay. You just have to find a way to get out of it as soon as you can.
3 ways to release yourself after cosigning a loan
Fortunately for you, there are ways to get out of a cosigned loan. You do not have to suffer the stress – knowing that someone out there has the power to ruin your credit score if they decide to stop paying the loan.
Here are the three options that you can use to get out of this loan agreement.
Refinance the loan
Did you know that a lot of graduate student loan borrowers, the one that has the most cosigned loans, are not aware that they can refinance? Only a small percent of student loan borrowers refinance their loans. This is unfortunate because it is one of the ways that you can get out of a loan that you cosigned. This means the borrower will apply for a new loan with a new set of terms and interest rate. If he or she paid off the initial loan properly, that would have given them a good credit score. It will place the borrower in a better position to get a lower interest rate. With a lower rate, they should be able to save more money on the debt. When they apply for the refinancing, they can do it on their own – without using your name as cosigner. That would have released you from the responsibility of paying off the loan. Since it was refinanced, the cosigned loan will appear as “closed and paid in full” on your credit report – which is what you want to happen.
Apply for cosigner release
Another option to get out of a cosigned loan is to apply for what they call a cosigner’s release. This is an option that, unfortunately, is not available for all loans. So before you even agree to cosign a loan, make sure this is an option that is available to you in the future. It usually involves a specific number of payments that you have to meet. Once that is satisfied and no late payments or problems arise, the lender could release you from being a cosigner. In case you did not bother to ask before signing to cosign the loan, that is okay. You can always call the lender to ask if this is something that you can arrange for the future.
Pay off the loan
This is probably the least of all your options. If you really want to get out of a loan that you cosigned, you just have to end it yourself. You can pay off the debt. This usually works well if the loan was used to buy something – like a house or a car. You can sell that to pay for the balance of the loan. It may become a problem if the primary borrower refuses to sell it and it is only their name that is one the title. However, if they are having a hard time paying the loan off, then you can persuade them that this is for the best.
Why being a cosigner is not a good thing
In case you are successful in getting out of a cosigned loan, this should be a lesson for you not to do it again. If you are a parent of an incoming college student, you need to think about your options very carefully. According to reports, more students are opting for private cosigned student loans. Federal student loans have a lot of requirements are also very limited. This is why students usually need a private student loan to fall back on.
The thing is, they cannot borrow from private lenders without having a cosigner. And this is where it becomes a problem. We all know how cosigning can be dangerous – regardless if it is for student loans, car loans or a mortgage.
There are various reasons why cosigning a loan is a problem.
You might be helping a high credit risk borrower.
First of all, the reason why the primary borrower cannot get the loan on their own because they are not qualified to do it. If it was student loans, it is most likely because they have a thin credit history – which is acceptable. But if you are cosigning for someone who is old enough to have their own credit history – then you need to think twice before you agree. Most likely, their bad credit behavior led to their inability to borrow money on their own. If this is the case, there is a high chance that they might not pay the loan properly and leave it to you to clean up the mess. It is better for you to help them build a good credit score for themselves instead of putting your own on the line.
You are not really helping them.
It is better to steer them away from the easy way out because that will not teach them a lesson. If their inability to borrow money comes from previous payment mistakes, then you should not be helping them at all.
Your credit reputation will be at risk.
Every payment will affect your own credit report. Not only that, it will increase your level of debt. In the event that you need to borrow money, this debt might be the reason for your application to be denied.
You have nothing to gain from it.
Another reason why this is not a good idea is that there is nothing in it for you anyway. You are just putting your credit reputation on the line out of goodwill. It is not like you are being selfish or anything. In fact, you are not really helping the primary borrower. What you need to do is to teach them how to fix their finances so they do not have to rely on a cosigner to borrow money. That is actually the best thing for you to do.