Recently, a friend asked my advice about what to do regarding a loan she co-signed for one of her children. It seems this person co-signed a car loan for a son who graduated last year from college, but he’s now having trouble coming up with the payments in a timely fashion. She’s concerned because he’s been late with some payments, and she now wants to make the obligation exclusively his. Unfortunately, I didn’t have good news for her.
It is very common for co-signers who wish to no longer be associated with the running obligation to inquire about how to be removed from the loan, thinking that key elements can be significantly augmented during its term. That is simply not the case; the loan, including the terms and the parties to it, are memorialized contractually, and the only way that material components to a loan can be changed is through a refinance, which means a new loan. The problem with that, of course, is because the present loan isn’t going so well, and the son is the one whose falling on his face regarding the obligation, there’s basically no chance that any lender will go along with a refinance in the way mom would like – he would have to qualify in his name alone, and the likelihood of that happening is nonexistent; she’s stuck.
I’m not going to flatly say that no one should ever, ever co-sign, because there may be an unusual circumstance that applies such that it makes sense, in one’s particular universe, to be a co-signer. However, for the vast majority of people, co-signing is simply unwise, and you would do well to generally assume that you are a permanent member of that group. The most important part of co-signing that anyone contemplating the decision must remember is that you are tied to the loan for the life of that loan. If it works out that the person for whom one is co-signing can eventually qualify for the obligation solely in his name, great, but if that cannot happen, you will remain a borrower of record (and, to be honest, the principal borrower of record) for as long as the loan exists, which further means that if the loan goes bad, so will your credit.
The advice that I had, such as it was, is that it is incumbent upon my friend to squarely put herself into the present, daily existence of her son for the purpose of seeing to it that his financial house is appropriately in order – if it were me, I would demand to know the details of how my son is living, the amount of his income, as well as the amount of his expenses, and insist that he adhere to a budget to ensure that he can either make the payment, or, at the very least, that whatever amount I have to contribute to make up for the shortfall is as minimal as possible. As I told my friend, you did your son an enormous favor, and assumed considerable risk, by co-signing for the loan and giving him access to a car that would have otherwise been unavailable, and so now that his ability or willingness to repay is in a deteriorated state, you now have the right to stick your nose in every aspect of his financial life.
This actually brings to mind something that those who insist on co-signing should do, at the outset – make the “sticking of your nose” in the other borrower’s business a consequence of what will happen if he cannot make timely payments; as long as the loan remains fully performing, all is well, but the moment it becomes in any way troubled, you will now become the personal, “in your face” financial coach until the problem goes away. However, it’s best to make this a clear, understood condition before signing, so that the person for whom you’re co-signing is not surprised when you become the warden of his new financial prison.
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