Co-signer blues

Dear Dr. Don,
I co-signed on an auto loan for a friend about a year ago. Now I find myself making the loan payments because the monthly statements showed that they weren't being paid on time. I have never had bad credit and I don't plan on going there.

I asked my former acquaintance to refinance the car since the beginning of this year but to no avail. I refuse to pay for the car anymore or resolve parking tickets when I don't even have access to the car. What should I do?
Melissa Motorcar

Dear Melissa,
Co-signing an auto loan means that you agree to make the payments if the primary borrower doesn't make them.

People tend to shrug that possibility off, but there are two reasons why someone needs a co-signer in order to get a loan: either they don't have a credit history, or they have a bad credit history.

Either way you're taking a leap of faith when you co-sign a loan. If your ex-friend isn't making payments and needed you as a co-signer to get the original loan, then a solo refinancing a year later isn't a realistic alternative.

The optimal solution would be for your acquaintance to agree to sell the car and pay off the note. It's likely that they are upside down in the car loan, meaning that the loan balance is more than what the car is worth.

If that's the case, then the two of you will have to come up with the additional cash to pay off the note. This is bound to be a cheaper solution to preserving your credit rating than taking over the payments for the balance of the loan.

You must be listed on the title as a registered owner or you wouldn't be worried about those parking tickets. That's good news as it gives you an ownership interest in the automobile if and when the loan is ever paid off. The bad news is that you're making payments on a depreciating asset, so you won't get much of a return on your investment other than protecting your credit rating.

Do you know how the car is registered? It's possible that your ex-friend isn't even on the title.

If it's just you and the loan company on the title, you can provide written notice (certified mail with signature receipt) that as of a specified date he or she will no longer be allowed the use of your car and that you will report the car as stolen if not returned to you in good condition as of that date.

If it is just your name on the title, you also need to talk to your auto insurance agent about insuring the car until it is sold. Insure the car before sending the letter.

If you both stop making payments, the car will be repossessed. When the loan company then sells the car, you are liable for any deficiency between what you owed on the vehicle and the sales price. You'll also be responsible for all or part of the costs associated with the repossession and sale of the car.

Repossession will hurt your credit rating, but will bring the situation to a head. After the repossession you and your co-signer will be responsible for making the bank whole. The repossession will stay on your credit report for seven long years, but once the lender has been made whole, at least the report won't show an outstanding balance on the loan.

A voluntary repossession might minimize the costs, but if you don't have access to the car, I don't see how you can effect a voluntary repossession. This Federal Trade Commission (FTC) feature provides additional information about car repossessions.

-- Posted: Oct. 8, 2000