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Getting out from under co-signed auto loan

Dear Dr. Don,
I have a question regarding co-signing an auto loan. Last summer I helped a friend out and co-signed his auto loan. The problem is I have some things I would like to do but I can't as the bank looks at my debt ratio and says I have too much, which I don't, as it's my friend's car loan that I co-signed for.

So I told my friend that he needs to refinance his car to get me off. However, he has a big problem with getting his car refinanced due to his bad credit, which is way below 525. We have even tried to trade his current car in to get an older model and that still doesn't work. This car loan is for seven years, and I can't be stuck with this.

Do you have any suggestions or places I can try to find for my friend with bad credit? If he can get someone else to co-sign, is that a possible consideration? I look forward to your help and/or suggestion. Thank you very much and have a good day.
-- Nelson Nullify

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Dear Nelson,
As a co-signer on the loan you are every bit as obligated as the primary borrower to repay the loan, and it's appropriate for that obligation to be reflected on your credit report. A credit score of 525 is pretty abysmal, so it's no wonder he's having problems refinancing without a co-signer.

Below is a graphic from the myFico.com Web site that shows the distribution of credit scores. Your friend's score is down where he's not going to be able to find willing lenders. It's also going to take some time for him to rebuild his credit to the point where lenders are willing to loan him money on his own.

Refinancing with a different co-signer can work, but they'll have to have good credit for a lender to be willing to commit. A potential problem in refinancing is that it's possible that you're upside down in the loan, meaning the loan balance is more than the car is worth. Auto loans are secured loans. Borrow more than the car is worth and there is an unsecured component to the loan that makes it riskier to the lender. More risk means a higher interest rate.

Selling the car would get you out from under the obligation, but you have to convince your friend to do it. Then he'd be on his own in finding a replacement vehicle and financing for that vehicle.

There isn't an easy answer to your problem. You're looking at all the right things and just need to either accept the consequences of your decision or work with your friend to have him either sell the car or find a different co-signer.

Bankrate.com's corrections policy-- Posted: Nov. 16, 2005
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