Help! I co-signed on a loan and now I wish I hadn’t!
Ah, relationships. Without other people, money management would be easy! Easy-er, anyhow. But love, family, and business relationships tend to make people do things they know they really oughtn't.
Take Patrick, for example. He fell in love, and it led him to commit a financial faux pas. Here's Patrick's l-o-n-g story and his questions:
A couple years back, I met a girl, fell in love, and we moved in together. A few months into our cohabitation, her car died. Since we needed to separate cars for work, we went to a dealer to see what she could find in the way of a used vehicle.
After a long time sitting in an office, test driving a car, and running her credit (which was not very good), the dealer came back with an offer sheet for a high-interest, short-term loan with a payment of $750 a month, an impossible figure to work into her budget. She asked for a different deal, and they said, “This is the best we can do without a cosigner.” Hearing my cue to play the role of the “hero,” I stepped in, which cut the interest dramatically and the payment by half.
Now for the moment you've been waiting for: My girlfriend decided to move away, and she ended up in a different time zone. We stayed together for a bit, but realized it wasn't going to work long distance and broke things off.
Following the break up, the situation with the car deteriorated. After never missing a payment before, she's now only made one payment in full and on time — and she's been gone over a year. Several times, she's been over thirty days late on payments, and my credit has already taken a hit (though it's still listed in the good/fair range).
But there have been other issues with the car. She lapsed on insurance once and neglected to tell them about a change in insurance another time. Both times, they took out insurance on the car at an astronomical rate for the times it looked like the car was uninsured and that money's been added to the principle. She also neglected to register the car after she changed states and the registration on the car in my state expired more than ten months ago. For that time, she's been driving around in an unregistered vehicle in both of our names.
I've contacted her to try and see when we're going to get back to smooth financial sailing, but I get only false promises. She tells me she'll make a payment on time, and then I'll get a call ten days later from the bank saying it's past due.
It does seem like she's trying at least, and even though the payments come late, they do eventually come. I've suggested she sell the car, even if it is at a loss, but she's not taken any action. The latest plan is to have another friend refinance it with her and get my name off the car, but that friend (who is financially solvent enough to pay off the whole car if necessary) has not yet stepped up to do so. Nothing I say to her has compelled her to do anything but give more promises.
So, fellow readers, what do I do? How do I untangle myself from this financial web to which I'm legally tied? Can I do anything at all? Or am I just a cautionary tale? Feel free to call me names. You can't think me stupider than I've thought myself over the past year, so I am unafraid. The frustration and stress seems to be at a point where I need to find a solution, and not just label myself as “bad with money.”
Ah, Patrick. I feel for you. I really do. While I've never been in this situation, I know people who have. (One member of my family loaned another $20,000 and has never been repaid.) Plus, I've done some stupid things myself. I once shared an apartment with my cousin for a few months, and I'm fairly certain I never paid my share of the rent for part of that time. (It was almost 20 years ago, so I've forgotten the details.)
It's important to note that not every financial transaction between family and friends ends in disaster. In fact, although there aren't any stats on the subject, it's likely that most transactions go smoothly. But the potential for trouble is so great that you should think twice — or thrice — before lending (or borrowing) money. Or co-signing on a loan. Ask yourself what would happen if the borrower never repaid. Or, as in Patrick's case, the co-signer left town. How would it affect your finances — and your relationship?
You're usually better off saying “no” rather than putting yourself in a position where you have to hound a friend for money. Which would make you feel worse: the momentary pain of telling a friend “no”, or the ongoing anguish of having a languishing loan destroy a friendship?
Despite these warnings, there are times we're tempted to lend money to people we know. When this happens, be smart about it.
- First, discuss other options. Is there some other way you can help other than giving money or co-signing on a loan?
- This is important: Only lend money you can afford to lose! You may never see the money again, so don't put your own financial well-being on the loan just because your girlfriend can't afford a new car. (Sorry, Patrick.)
- Be clear about expectations. Draw up a payment schedule and discuss what happens if something goes wrong.
- Get it in writing. Don't just hand over money without some sort of record. You can find all sorts of legal templates online. Use them.
- Deal with problems immediately. You may feel like a nice guy by not reminding your borrower that they're 30 days past due, but you're just setting yourself up for trouble. Communicate.
Having said all that, these guidelines don't help Patrick solve his problem. These are things he should have done to avoid trouble in the first place. To be honest, now that he's in trouble, I don't know what his options are. Do you?
Have you ever loaned money to a friend? Co-signed on a loan? How'd that work for you? What sorts of legal protections did you take? If you've ever been in a situation similar to Patrick's, how did you resolve things? Does Patrick have any legal recourse to repossess and then sell the car? How can he go about getting his ex-girlfriend to prioritize this debt?