Whether it’s due to having no credit or bad credit, a day may come when a family member or friend asks you to cosign a loan. Before you answer, you need to give the situation a lot of thought. By cosigning a loan, you’re legally responsible if the other person doesn’t pay or if they die. The situation could hurt your credit score as well as your chances of getting a line of credit in the future.
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According to the Federal Trade Commission, 75 percent of cosigners end up repaying some or all of a loan when the primary borrower defaults. If you’ve already cosigned a loan, there are steps you can take to remove your name from the debt and limit your liability.
Request a cosigner release
In some cases, such as if you signed a private student loan with your child, lenders will allow you to file paperwork to remove a cosigner’s name from a loan. The primary borrower will need to have demonstrated responsibility for the loan, such as making regular, on-time payments and having a good debt-to-income ratio. To help with this request, you can use the sample letter provided by the Consumer Financial Protection Bureau as an example. It’s important to know that lenders don’t have to approve the release. You may want to check the loan documentation to find out if it’s a possibility.
Refinance the loan
If the primary borrower’s situation has changed, and they can qualify for a personal loan, personal line of credit or mortgage on their own, you can request that they refinance the loan to consolidate their debt. This option replaces the first loan with another. In addition to taking responsibility for their finances, today’s low interest rates may be an attractive reason for the primary borrower to agree to take this path. They may also choose to refinance the debt for a longer term if they need to lower the payment.
Sell the asset
If the loan is for an asset you have rights to, such as a car, you may be able to sell it to pay off the balance. You’ll need to have the primary borrower’s buy-in on this option if their name is on the title. If your name is on the loan as well as on the title, it’s much easier to liquidate the asset and pay the loan.
Transfer the balance
If the primary borrower can qualify for a credit card that offers a zero annual percentage rate for an introductory period and has pre-approval offers, you can suggest that they transfer the unsecured debt. This could give them a period of time to pay off the debt while avoiding interest. It can also help them build their credit for the future by adding another form of loan to their credit mixture.
Use your own money to pay it off
This may be the least attractive option, but if you want to ensure that your credit doesn’t suffer by being part of the loan, you can pay it off on your own and clear the debt. In some cases, you may not know that the primary borrower wasn’t paying back the loan until it’s in collections and the lender comes after you. By that time, the balance could include penalties and late fees, making it much higher. This could be an expensive lesson, and it’s one you’ll not likely make again.
It can be hard to turn down a family member who is in need. If you have enough money in savings and want to help, a better option may be to offer a personal loan that they repay to you directly. That way you don’t put your credit at risk.
But don’t loan money you can’t afford to lose. Mixing money and friendship can get awkward, so make sure you go into a cosigner situation understanding the risks. You don’t want to lose money and a relationship both.