When applying for a loan, you may need to have a co-signer, depending on your lender or creditor and their terms. A co-signer is someone who signs an official document, such as a loan agreement, with another person. They take the same responsibility for the loan and the co-signer understands that when he signs, he becomes responsible for the entire amount owed. Having a co-signer increases the likelihood that the lender or creditor will receive their money, in the event that the person receiving the loan is unable to repay it.
Co-signatories are usually required when the person requesting the loan:
- Has a bad or no credit record
- Has a low credit rating
- Does not have the required minimum income
- Is unemployed
- Is self-employed
- Is a student with an insufficient record
Most of these situations represent a high risk for the lender. A co-signer helps eliminate some of the risk and increases the likelihood of approval. The co-signer becomes responsible for payments that are not made.
Let’s say you cosign is a friend or family member and after a few months you regret your decision. Here are some ways to remove your co-signature.
If you want to opt out as a co-signer, the borrower must refinance his loan to change the terms of the loan agreement. You can refinance between each term throughout the life of your loan. The changes include the removal of co-signatories and perhaps even the reduction of interest rates. This will decrease the borrower’s monthly payments, which will help repay the loan faster. This can be applied to most types of loans and is the most favorable option, especially for loans with large balances.
- Improve the solvency of the borrower
If you want to withdraw as a co-signer before the loan has been fully repaid, the borrower needs to improve his credit rating so that he can take over the loan on his own. To help the borrower improve his credit rating, he can go through the following steps:
The borrower should send a copy of his free credit report once a year
Find out what problems are affecting your credit rating: is it because of missed payments? Is the credit rating too low?
The borrower needs to focus on these issues in order to develop a plan that can help them improve their credit rating. Know that this action can be difficult to accomplish. The reason you had to co-sign a borrower’s loan initially was because he did not have enough credit to be approved on his own.
- Repay the loan faster
If you have to withdraw as a co-signer of a loan because of your own financial needs, you could ask the borrower if he can make additional payments to pay off his loan faster.
- Sell the financed property
If you co-signed for a secured loan, such as a car loan, you could ask the borrower to sell the property. If the borrower is unable to make his payments, he could resell the car and repay the loan completely. So, you would not have to co-sign anymore.
- Close the account
If the borrower has not been able to make payments for a period of time and still has not improved his credit rating sufficiently to be approved for a new loan or credit card, he may close his account. Even if you need to pay or transfer the balance, it may be worth it to remove your account name.
As you can see, even though it is not impossible to delete your name as co-signer, co-signing is always very risky. If you do not know the other person well, do not co-sign. If you do not have full confidence in this person, do not co-sign. If the borrower has lost his job but really needs a loan, do not co-sign. These are all examples that can leave you in debt for years. You do not want to be responsible for someone else’s debt; you would lose money and your credit rating would be negatively affected. Despite the importance this can have for the borrower, always think of your financial needs first.