This scenario could happen to anyone of us: A friend or a family member applies for a personal loan with low-interest rate, but the lender required a co-signatory to the loan prior approval. How would you respond if they seek your help to cosign their loan?
Cosigning a loan means you are agreeing to bind yourself in paying the loan obligation in case the main borrower failed to do so. You are taking the risks that the lender might run after you if the loan obligation isn’t fulfilled.
Before deciding if you will cosign a loan, think of the implications it will bring. Always remember that whatever happens to the loan you cosigned will reflect in your credit score. It’s a good thing if the main borrower religiously pays the loan, but what if he is delinquent?
Here are the ways on how you can effectively get out of a cosigned loan.
Refinance or Consolidate Your Debt
How does it work? Loan refinancing means terminating the existing loan terms in lieu of the new terms with better-paying options while loan consolidation is the process of combining all your existing loans into one term.
Since new loan terms will suffice, you can then retreat your name as a co-signatory to the loan and get you out of the responsibility.
Get a Cosigner Release
Second option: Cosigner release. Some lenders offer this option, but unfortunately, not all financing companies do so.
Before entering into cosigning agreement, you may check if the clause on cosigner release is stipulated. This is usually under a specific number of payments the main borrower needs to do before you may be granted of a cosigner release. The loan should also be current and no late payments were recorded.
If it is, in fact, available and once the clauses are met, you can then apply for a cosigner release to free yourself on the loan obligation. If not, then try to negotiate it with the lender.
Pay the Loan Faster
If the main borrower is really having a hard time paying the loan and it already affects your credit score, then get out of the loan. If you have extra savings to help, you can be your own refinance lender. You just need to pay the loan faster and end it yourself.
However, you must set an agreement with the main borrower on how he will repay you. Discuss your own terms and agree that though you shell out some cash to pay the loan, your main borrower should still have to pay it to you in whichever way possible. It could be selling the car and dividing the proceeds if the loan you cosigned is a car loan.
Close the Account
This works for cosigned credit line or a joint credit card account holder. On these type of loans, the easiest way to get out is to close the account.
The catch here is, you and the main borrower should first settle any outstanding loan balance before you can close the account. It could be through paying the loan in cash or transferring it to the main borrower alone.
For joint credit card holders, you can simply remove your account if the primary account holder requested that you’ll be removed as a credit card extension.
The similar also works for leasing agreements. A new lease agreement will be available once the existing agreement was closed by an existing lessee.
Improve Main Borrower’s Credit Rating
If you agreed to cosign a loan, it means that the main borrower is very close to you. If that’s so, then you can also help them improve their credit rating by guiding them how to improve their financial habits. Here are some tips from Cash Mart on how to improve credit rating:
- The borrower must review his credit score at least once a year.
- Check on the possible issues or payment habits that are affecting the credit rating. There may be some experienced delayed payments that can be avoided if only the main borrower keeps track of his dues.
- The main borrower should focus on one or a couple issues and come up with a concrete plan that can mitigate the risks of low credit score.
By helping them, you are also helping yourself to get out of the responsibility. However, you must have a lot of patience and monitoring with them to achieve this. The probable reason a co-signatory was required to their loan was that of their not so impressive credit history.
The Bottom Line
Before entering into a co-signing agreement, think carefully if the person you guarantee is really worth the risks. If you’re in such agreement and no longer wants to be a consignor, study the options offered.
The goal of getting out of a cosigned loan should at least empower the main borrower to assume full responsibility for the loan.
The bottom line is, you should have your own sound financial options available at the time you need it and not hurt your financial credibility and scar your current credit score just because you extended help to a person who’s least concerned of theirs and your credit rating.