If you decide to co-sign for a loan, you are legally responsible to pay it back. Even if you’re just co-signing as a favor, you’re liable for the payments if the person who took out the loan defaults.
For this reason, you should think long and hard before you co-sign for any loan.
If your name is already attached to a loan as a co-signer, it can be hard to get it off. For starters, a co-signed loan is a legal document. You’ll have to go through proper procedures to take your name off.
Perhaps even more important, the lender might not want to let you off the hook. The reason you had to co-sign in the first place is that the original borrower couldn’t qualify for a loan on their own. The lender is less likely to get paid if you are let free from your responsibility.
The first step in getting your name off a loan as a co-signer is to enlist the help of the original borrower. Then, the two of you together can explore the possible options.
1. Debt Payoff
The hard truth is that it can be difficult to remove your responsibility as a co-signer from most loans. In many cases, it can be impossible.
However, there is an easy fix to end your liability: pay off the debt.
In a typical co-sign situation, the original borrower makes payments, while the co-signer is more of an insurance policy.
If the original borrower stops paying, however, that “insurance policy” goes into force. In that case, you’ll have to take proactive steps to protect yourself and your credit.
Paying the debt is the cleanest, safest way. If there’s no debt, you’re not on the hook any more.
Of course, paying off someone else’s debt can be problematic. For starters, you might not have enough money laying around to pay it off. Next, you may never see that money again, and it’s going to a debt that you didn’t even incur yourself.
If the original borrower simply won’t pay, however, you may have to take this drastic step to protect your credit and your overall finances.
2. Balance Transfer or Refinance
One option to wipe out the debt can be to use a zero-percent balance transfer credit card. Or, you can refinance a loan with another loan, such as a personal loan.
With a balance transfer, you’ll move the debt from the original lender to a credit card issuer. If you can snag a zero-percent offer, you won’t have to pay any interest on the loan for a certain period.
This will give you extra time to pay down the loan without incurring additional interest charges. You should expect to pay three percent or more as a fee to the credit card company for performing the transfer, however.
Refinancing with personal loans
Personal loans tend to be unsecured installment loans that offer you a lump sum of funds to do as you wish. In this case, you pay off the co-signed loan with it.
Original borrower must take this step
As a co-signer, it is important to have the original borrower sign up for their own zero-percent balance transfer or the refinancing personal loan.
You will no longer be liable for the debt, and you won’t have to put up any money out of your own pocket. Plus, the original borrower will have extra time to deal with the loan without adding extra cost to it.
3. Student Loan Release
Student loans are one of the most commonly co-signed loans. Since most new students don’t have much credit, a parent or relative often co-signs for these loans.
Many private student loan companies do allow co-signers to take their names off loans. However, lenders usually look for a series of on-time payments before even considering this option. A credit check may also be required.
According to the Consumer Financial Protection Bureau, these “co-signer release” programs are not often advertised by student loan providers. You may want to send a letter or otherwise ask the head of your loan servicing program if this is an option.
4. Death of the Original Borrower
For student loans, if the original borrower dies during the course of the loan, federal loan programs discharge the debt. This may or may not be true with private student lenders, however.
You should check the terms of the program regarding this unlikely and unfortunate event.
For other co-signed debt, the death of the original borrower may be a way to release your obligations. However, this is not always the case.
For loans and credit card debts, the decedent’s estate may pay off those existing obligations.
However, you don’t lose your legal obligation to pay just because someone dies.
If the decedent’s estate is unwilling or unable to pay off the co-signed debt, you may be the path of least resistance for a lender.
5. Sell the Collateral
Many co-signed loans are backed by collateral. Collateral is an asset that is used to pay off a loan in the event of default.
For example, if you take out a car loan, a lien is placed against your car, which becomes collateral for the loan. If you don’t make your car payments, the lender will repossess your car.
If you co-sign for an auto loan, this might seem like a way to get out of the obligation. If the original borrower stops making payments, the lender will just take the car back to satisfy the loan.
The problem with this course of action is that it dings your credit. Even though you had nothing to do with the car, other than being a co-signer, your credit report will show that you defaulted on the loan.
This will drive down your credit score and make it harder for you to get credit in the future. At best, you’ll only be allowed to take out loans at much higher interest rates.
To avoid this scenario entirely, consider selling the collateral for the loan on your own terms.
Do it yourself
You’ll definitely need the permission of the original lender to go this route, as that person is most likely the registered owner of the car.
If you can sell the car, you can use those proceeds to pay off the loan. In some cases, there may even be some extra money left over that the original borrower can keep to put them on a more sound financial footing.
You can go through this process for any loan that is secured by collateral, not just a car loan. For example, if you're a co-signer for a home mortgage, you can sell the underlying home to pay off the mortgage.
6. Divorce Is No Answer
If you co-sign a loan with your spouse, you’re always liable for that debt, even if you divorce. Even if you make an agreement during divorce regarding separate liabilities for debts, your lender will still likely hold you both accountable.
You may be able to ask for the removal of your name from the co-signed loan, but there’s no guarantee the lender will agree.
As with other types of loans, the best way to get out from under may be to pay off the debt, or at least consolidate or transfer the date into the name of one person only.
7. Play Hardball
The most difficult and unpleasant way to end your co-signing relationship is to sue the original borrower.
The downsides of this course of action are many. Legal proceedings in general can be disagreeable. If you’re suing someone that you cared enough about to co-sign with in the first place, the whole process can be downright ugly.
At the end of the day, suing the original borrower doesn’t relieve your obligations to satisfy the debt. However, it can provide you with reimbursement.
These types of cases can be complicated, and you’ll definitely need to consult an attorney if you’re even thinking about going this route.
When done properly, you may be able to get a legal judgment against the original borrower.
However, you still may never get paid back. If the original borrower needed you to get the loan in the first place, he or she may not have any money to pay you back, even if you’re legally entitled to it.
You might also still face negative credit ramifications if the loan was ever in default.
The Crux of the Matter
Becoming a co-signer is a legally binding process. When you sign that paper, you are accepting the same responsibilities and obligations for a loan as the original borrower.
In most cases, this legal obligation never goes away.
There are certain steps you can take to satisfy your legal obligation, ranging from paying off the debt to getting a balance transfer.
In the case of some student loans, you may be able to ask for release, if the original borrower is willing and able to handle the debt.
Beyond that, your options are slim.
Divorce won’t relieve you from your obligation, unless the lender agrees or you refinance in one name.
Even the death of the original borrower won’t usually erase your responsibility, unless you’re talking about a federal student loan or a payment from the decedent’s estate.
Legal proceedings are an option, but only as a last resort. Even a “win” in court won’t technically absolve you as a co-signer. At best, you’ll be indemnified for your payments, but the costs may include a shredded credit record and a damaged relationship with the original borrower.
All things considered, it’s wise to think twice about co-signing for any type of loan from the very beginning.