Dear Dr. Don,
I am a co-signer of a motorcycle. My credit score is 730. The lead person on the motorcycle loan lost his job and can no longer afford to make the payments. The bike is worth $9,500. The amount owed is $13,990. I have been making payments to keep my credit safe. What options do we have so I don't destroy my credit? We want to get rid of the bike.
-- Cynthia Cycle
To quote from the FTC's Facts for Consumers guide "Co-signing a Loan": "When you're asked to co-sign, you're being asked to take a risk that a professional lender won't take. If the borrower met the criteria, the lender wouldn't require a co-signer."
You're every bit as responsible as the primary loan signer for the bike payments. That's what being a co-signer means.
In some states, the lender has to try to collect from the primary debtor first before trying to collect from you. In other states, the lender doesn't have to take that first step. Regardless, you are responsible for the payments and the payment history will show up on your credit report. The contents of your credit report determine your credit score.
Because you're upside down in the loan and the primary loan signer is out of work, his refinancing the loan isn't a realistic solution. Selling the bike will still require the two of you to come up with an additional $4,000 to pay off the loan so the new owner can get a clear title.
If you can't come up with the cash, the best option to protect your credit is to continue making the payments with the hope the primary debtor finds work soon and will be able to start making the payments again.
A voluntary repossession -- where the primary loan signer turns the bike over to the lender -- can save some of the costs associated with an involuntary repossession. That basically means you don't have to pay for the repo man, but it will still hurt your credit history.
In addition, you'll still be responsible for any deficiency when the bike is sold if the proceeds don't cover the loan balance and the lender's costs associated with the repossession and sale of the bike.
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