How to get out of a co-signed loan if the borrower defaults

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When you co-sign a loan, you are agreeing to being just as responsible for repayment of that loan as the main borrower. When the main borrower defaults or makes a late payment, the lender can request that you repay the loan. This jeopardizes your credit rating, legal status, and finances altogether. Your responsibility first is to understand the scope of your liability before establishing an exit strategy.

There are certain loan agreements that will allow the release of the co-signer after a certain number of timely payments by the main borrower, or in refinancing the loan. Read the agreement thoroughly to find out if there is an "option of co-signer release." If the option exists, request the lender to act on qualification.

It is amongst the most effective means of getting yourself out as a co-signer when the borrower refinance the loan in his/her own name. This would imply that they will qualify for a new loan based on their own income and credit rating. Once refinanced, your duty on the original loan is over.

If there is no refinancing opportunity and the borrower has defaulted, you may need to settle the loan in order to prevent further credit deterioration. In some cases, lenders will accept a lesser sum. Although this still hurts your credit rating, it may limit legal action and long-term financial harm.

If you have to pay by default of the borrower, you can sue them for recovering your loss. It may be a civil case or mediation to recover payment. Though legal action is costly, it may be worthwhile for large sums.

In general, no. Most will request that the borrower refinance or both sign agreeing to release if possible in the contract.

Yes, eventually. On-time payments and paying down other debts will restore credit, but late payments will stay on your account for years.

Not entirely. As a co-signer, you’re legally obligated to repay the debt if the borrower doesn’t, and the lender can take legal action against you.