What to do when the loan you co-signed defaults
There's a reason a lender asked for a co-signer -- and now you are being asked to step up and pay. Know what your options are.
This post comes from AJ Smith at partner site Credit.com.
Whether you co-signed a student loan for your child, a car lease for your father or a mortgage for a friend, you are now responsible for that debt. Unfortunately, if the borrower is not able or willing to pay back the loan, you must step up or face the consequences. Here are some steps to take if the loan defaults.
1. Ask for mercy
You need to determine whether the lender is willing to negotiate on terms. Sometimes if there is a temporary reason you or the borrower can’t pay, the lender may be willing to give you a few months to get back on track. You won’t know if you don’t ask.
Explain your circumstances. Tell the creditor that you want to pay off the loan but you aren’t able to now. This conversation might lead to a reprieve of a few months where you don’t have to pay or it could lead to smaller payments over a longer time. Be open to options and let the lender know you are trying to make it work.
Refinancing the loan can allow you to make smaller monthly payments, but the sooner you ask, the better. If you are way behind on payments, you may not be able to get a good interest rate or even a new loan at all. When refinancing, you could try having the primary borrower do this on his or her own. There is a chance that if the loan has been paid down significantly, they may qualify without you co-signing. This means you are no longer responsible at all for the loan.
On the other hand, you could also refinance by yourself. If your credit is much better than that of the borrower, You may get a better interest rate this way, but you will be solely responsible for the debt (though you are just as equally liable if the primary borrower doesn't pay). Of course, if it is for a car or home, you can take possession of the item and sell it to pay the loan back. This isn’t always a great option if the point of co-signing was to help your friend or relative have someplace to live. But if it comes down to it, you have the option.
3. Strike a deal
Try working with the borrower to make the situation better for everyone. You can offer to pay part of the payments each month or all of the payments for a few months until they can take over. You can even set it up so a portion of the borrower’s paycheck goes straight into your bank account.
Tips for next time
You may be scoffing at the thought of a "next time" but it’s good to be prepared just in case.
There are some things you can do upfront, before you co-sign to protect yourself. Try negotiating the terms. For example, see if you can get it in writing that you are responsible for the principal only and won’t have to pay any late charges or fees in the event of a default. Also, request that the lender notify you of any missed or late payments. Finally, make sure you have copies of all the important documents. Treat this as your loan -- -- your signature is on it, after all.
More from Credit.com:
- How payment history affects your credit
- Should you co-sign that loan?
- Can you get out from under a co-signed loan?
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
ABOUT SMART SPENDING
LATEST BLOG POSTS
If you're one of the millions of sleep-deprived Americans, here's how to find cheap sleep without pills.
VIDEO ON MSN MONEY
BLOGS WE LIKE
MUST-SEE ON MSN
- Video: Easy DIY smoked meats at home
A charcuterie master shares his process for cold-smoking meat at home.
- Jetpacks about to go mainstream
- Weird things covered by home insurance
- Bing: 70 percent of adults report 'digital eye strain'