As debt relief specialists, there are many times where we’ve spoken to people who co-signed for their friend’s loan. Whether it’s a loved one, friend, or associate, people often co-sign as a generous and friendly gesture.
But now, they’re not paying. And you’re the one dealing with the consequences.
There are consequences to co-signing a loan, and even if your friend promises you they will be able to repay, you’re still on the hook for what they owe if they don’t.
Today, we’ll provide professional advice for dealing with a co-signed loan when the borrower is not repaying.
The Reality of Co-Signing: What Happens When Things Go Wrong?
When you co-sign someone’s loan, you’re legally agreeing to repay the loan if they don’t.
A lot of people don’t fully realize this until they get a call from the lender or see their credit score drop. For the lender, you and the borrower are both equally responsible for repaying the loan.
As a result, payments missed on a co-signed loan will result in:
- An impact on the borrower and the co-signer’s credit score
- Collection calls to both the borrower and the co-signer
- Collection actions against the borrower and the co-signer, including but not limited to: wage garnishment or asset seizure.
Can I get out of paying a loan if I’m the co-signer?
As a co-signer, you’re legally obligated to pay the loan in full if the primary borrower doesn’t. As such, you usually can’t get out of paying the loan as the co-signer. It is essentially the same as if you have taken out the loan yourself.
In certain cases, the lender may agree to release you from the loan. However, this is usually only possible if the loan is in good standing (actively be repaid by the primary borrower).
What Are Your Options if Your Friend Isn’t Paying the Loan You Co-Signed?
Talk to The Primary Borrower
Try to get the situation sorted out first with the primary borrower (your friend, family member.etc) before doing anything else. Of course, it’s a difficult conversation to have.
You have every right to be very cheated, but it’s important to handle the conversation with understanding. Mean words and accusations will just burn bridges and push the person away before you can both come to a resolution.
We recommend approaching the conversation with these simple steps in mind:
- Tell the primary borrower about the problem and how it is affecting you.
- Ask them why they aren’t paying the loan and if they’re struggling to afford repayment.
- Work together to come up with a repayment plan, which may involve you helping with payments or starting a joint consumer proposal.
If they can’t come up with a repayment plan that works for you, consider referring them to 4 Pillars to discuss debt relief options. We can recommend strategies like debt consolidation, which may allow them to repay the loan with a lower interest rate than what they initially signed for.
Book a free consultation with 4 Pillars!
If your friend is unreachable and unwilling to work with you on repayment, consider the other options below.
Repay the Loan
This isn’t ideal, but paying what you can may prevent further credit damage or collection actions. It also shows good faith if you need to negotiate with the lender later.
Negotiate with the Lender
Call the lender and explain the situation. Ask if the loan can be modified, deferred, or restructured. Some lenders are willing to work with co-signers who are actively trying to resolve the issue.
Seek Legal Advice
If the primary borrower is not cooperating with you or the lender, it may be wise to get legal advice for your situation. Depending on your circumstances, you may be able to recover some of the money you’ve used to repay the loan. A lawyer will be able to tell you whether suing the primary borrower is viable, and what other legal remedies there may be.
Advice for Co-Signing Loans in the Future
- ALWAYS understand that you are just as responsible as the borrower for repaying a loan you co-signed. It’s best practice to never co-sign a loan unless you know you can and are willing to repay it.
- ALWAYS put agreements in writing, especially if the person has promised you they will be able to repay the loan themselves. Have a clear, signed agreement between you and the borrower outlining responsibilities, timelines, and what happens if they default. This will be helpful later if they fail to make payments.
- ALWAYS monitor the loan and whether it is being repaid. Many people don’t do this and are shocked to discover later on that the loan has been delinquent for months or even years.
- When someone is asking you to co-sign a loan, it’s usually because they don’t have good enough credit to qualify for the loan on their own. This doesn’t necessarily mean they won’t repay it, but it’s something to be mindful of in your decision-making.
- Many relationships end because of co-signed loans. If someone dear to you is asking you to co-sign a loan for them, consider whether you’re willing to deal with the consequences that it might bring to your relationship.
