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Ask Dr. Don

Co-signer wants out

Dear Dr. Don,
I will be getting married in 3 months. My fiance has co-signed an automobile loan for his mother. He wants to get out of this contract. His mother does not want to sell the car, trade it in or pay off the balance. This dilemma not only affects him but my personal liability toward this loan. She has sole ownership of the car. What recourse does he have?
Irate Irene

Dear Irene,
I usually limit myself to financial advice, but just this once I'll throw in some free marital advice, too. When talking about your future mother-in-law, don't use terms like recourse when evaluating your fiance's options. They'll both resent it. When he co-signed the loan, it was for the life of the loan. Creditors can and will expect the son to make the payments if the mother does not.

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The Federal Trade Commission has an online brochure, "Co-signing a Loan," that discusses this obligation in greater detail. One important point made in the guide is that the co-signer should ask the lender to agree, in writing, to notify the co-signer if the borrower misses a payment. That will give him time to deal with the problem or make back payments without having to repay the entire amount immediately.

If she's in no hurry to pay off the loan and doesn't plan on selling or trading in the car any time soon, then a refinancing is your fiance's only option to get out from under the loan. For this to be a viable option, the mother's credit history will have had to improve enough for a lender to be willing to loan her the money without the son co-signing the loan. It's also important that the loan balance is less than what the car is worth. Otherwise, she's upside down in the car and won't be able to borrow enough to pay off the current loan.

You're right to be concerned about how this obligation will affect your ability as a couple to reach your financial goals. Late payments and missed payments will show up on your fiance's credit report and hurt his credit score, limiting his ability to qualify for credit. Arranging a refinancing may be possible, but if it's not then he needs to honor the commitment and ensure that payments are made in full and on time.

-- Posted: June 26, 2002

Read more Dr. Don columns
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See Also
What to do when you co-sign a loan and the debt isn't paid
Be honest with your co-signer, even when they're your parents
Pitfalls of co-signing a loan
Financial advice glossary
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