Have you been convinced to co-sign a loan or credit for a friend or family member? Maybe at the time, you thought you were doing a good deed, but what happens when that co-signed person does make his/her payments on time?
What happens to your credit and are you liable for the debt?
You are on the Hook as a Co-Signer
Here’s the truth. Yes, you did something nice by co-signing the loan, but now you are on the hook for the debt. Even though you only offered your credit to help your friend or family member get the loan, you are still on the hook for the payments if they aren’t made.
When you sign the loan as a co-signer, you agree to take financial responsibility if the borrower doesn’t pay. In fact, you face the same circumstances as the co-signed person. The creditor can come after you for payments and will report the non-payments or late payments to the credit bureau, affecting your credit.
What Should you Do?
Your options unfortunately are limited when you’re dealing with a defaulted co-signed loan. Ideally, you would pick up the payments and avoid the damage to your credit. By making the payments, you may avoid other negative actions, such as a lawsuit.
The best case scenario would be that you take over payments while the borrower gets back on his/her feet. The borrower can then take over the payments again and hopefully pay you back the amount you covered for him/her.
Getting out of a Co-Signed Loan
If the co-signed can’t pay his/her loan, the chances of you getting out of it are slim to none. But once the borrower gets back on his feet, you may be able to get yourself off the loan if the borrower refinances. You’ll need to wait until the borrower has good or at least decent credit, though.
Borrowers can consolidate the loan with other debt in a debt consolidation loan or just refinance the debt to get you off of it. When the borrower refinances, they do so in their own name, which then releases your financial obligation, which is important as it gets you off the hook in a difficult situation.
Things to Consider Before Co-Signing a Loan
Before you agree to co-sign a loan, consider the following:
- Only co-sign for someone you know is trustworthy
- Have a written agreement with the borrower about how the payments will be handled and what will happen if he can’t make payments
- Ask the borrower to refinance you off the loan as soon as possible
Co-signing on a loan is risky business. There’s no way out of being liable for the loan if the co-signed person defaults. Know what you’re getting yourself into and make sure you know the borrower’s payment habits before agreeing to go on the loan with him/her. It’s a big risk to your credit and even your financial status so consider the decision carefully.