Many of us have a family member or friend who seems to be unable to get it quite right with their finances. Whether they are our children, and are just starting out or an older relative or parent who has taken a financial hit, if they come to us for help, we want to be able to give them the help them the help they need. This help can come in the form of cosigning for a loan.
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The Consumer Financial Protection Bureau found that in 2011 a whopping 90% of the private student loans taken out had a cosigner. This is up from 67% in 2008. Most of these cosigners were parents who just wanted to help their children receive an education. However, cosigners are not just parents, as LeaseTrader.com reported a 29% increase in parents asking their children to cosign on a car loan. Unfortunately, loan defaults occur. What do you do when the person you cosigned for is unable—or worse—unwilling to pay back the loan? Turns out, you do have some options as far as either decreasing payments or getting out of the loan entirely.
If you find yourself stuck with a loan you have cosigned for, refinancing is an option. According to Reyna Gobel, refinancing is the best option for loans with a larger balance. This may be difficult, however, considering that lenders prefer refinancers have good credit. If the loan has already been defaulted for some time, lenders are less likely to work with you in refinancing. However, it is worth a shot to decrease the monthly payments of the loan and make it more likely that the person you cosigned for will be able to make the payments.
There are a few different options when it comes to refinancing a cosigned loan. The first option is to, obviously try to refinance under the name of person who is on the receiving end of the loan. By this time, if a substantial amount of the loan has been paid off, the borrower may be able to refinance without a cosigner, which absolves you from further responsibility. Secondly, you can refinance the loan on your own. This is less ideal, considering you will now be taking on sole responsibility for the loan, but if you are just looking for smaller payments and have already been making the monthly payments, refinancing individually may be your best bet. If deciding to take this route, consider the amount of responsibility you will be taking on. If the loan was for something like a car or home, you now have the option of taking possession and reselling it in order to pay off the loan much quicker. The choice is up to you.
Though, your relative or loved one has defaulted on the loan, there are ways to work with them to help pay the loan or recoup the payments you have already made. Working with the borrower you can make a plan in which you agree to pay a portion of the monthly payments. This way, the borrower is still being held responsible, at least in part, and you are avoiding defaulting on the loan entirely. Another option may be to make the loan payments, yourself, and have the borrower direct deposit a percentage of their paycheck into your account, suggests Kristen Fricks-Roman a financial advisor from Morgan Stanley based in Atlanta.
In the event the borrower is not willing to work with you, and this is absolutely a last resort, there is the option of filing for bankruptcy. While student loans are nearly impossible to get rid of with a bankruptcy, it can be used for other loans. As suggested by Geoff Williams of U.S. News and the World Report, just the thought of an impending bankruptcy may be enough to instill enough fear in the borrower or lender that they choose to work with you. Again, this is a last resort, but if you are put in this position you may want to consider this option.
Long story short, cosigning a loan for a loved one, is highly advised against. If you are wondering whether or not to take this step, Jenny Kelly and MSN Money offer some advice. Luckily, if you have cosigned only to be left footing the bill, all is not lost. It is your responsibility to advocate for yourself and your personal finances. Although your decisions may affect your relationship with your loved one, in the end you have to do what is best for you.
Photo Credit: Gatanass