Co-signed loans are growing more pervasive, likely due to changes in the lending climate in this sluggish economy. According to the auto website LeaseTrader.com, co-signed car loans backed by children (not parents) have risen by 29% during the past two years.
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But no matter who co-signs the loan, if there’s a problem it needs to be addressed right away. Not only is the credit score of the principal borrower in danger, but the co-signer’s credit is, too.
Banks can be cold and calculating when it comes to recovering their money, and will go after who has the most in a bad situation. If loan payments are late, and the bank or other financial institution comes looking for you, here are three measures you can try to take:
Refinance the loan. This isn’t easy, but it could do wonders for solving your problem. It’s best if the loan is only behind temporarily and the principal borrower has a steady income. Smaller loans like car loans are usually easy to refinance, but if the loan is seriously delinquent, the lender won’t go for it. That’s why you should keep tabs on the loan and at the first hint of trouble, convince the borrower to refinance and get your name off the loan.
Ask the borrower to sell the loan. This only works with a loan commodity that can easily be sold, like a car loan. If the principal borrower is behind on a loan that has your name on it, convince the borrower to sell the vehicle and pay off the loan. He or she may not have any choice because if the loan grows seriously delinquent, the lender may repossess the car, anyway. Letting the borrower know this scary fact could steer him or her in the right direction, to the seller’s block.
Negotiate the loan before paying it off. If it comes down to just you, the loan amount and the creditor, brush up on your negotiating skills and put them to use. You’ll have to pay something, but the creditor might be so intent on getting 50 cents or so on the dollar that he’ll close the loan down if you agree to pay off a certain amount. This takes some preparation and complete transparency, so call the bank first to explain the situation and tell the lender you’ll be OK with cutting a check for partial payment of the loan. Aim for 50%, but be prepared for the bank to counter with something higher. When you come to terms, cut a check for the amount you’ve negotiated. It’s isn’t a pretty picture, but it will get you out from under the loan and protect your credit rating. This is especially doable with credit card debt, as card carriers routinely negotiate partial payments.
No matter what your situation in a bad co-signed debt situation is, know that most lenders, especially in tough times like these, are fairly open to working with you. Your odds will improve if you approach them first, tell them you’re amenable to a deal and hold up on your end of the bargain.
When all is finally said and done, remember to write “I will never co-sign a loan again” 100 times.
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