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Denied a Car Loan Thanks to Ex-Husband's Debt

Erica Sandberg

March 8, 2013

QDear Erica,

I tried to get a car loan from my credit union the other day, and I got turned down! They said it's because I'm a co-signer on my ex-husband's law school loans. I'm furious, and I want to know why that would matter. He's been paying the loans on time. What are my options? Can I get my name off the loan? My car is literally falling to pieces, and I need a new one. — Candice

ADear Candice,

Thank you for asking this question! It gives me the chance to say something very important to people who are thinking about lending their name to a loan. And that is this:

As a co-signer, you're liable for 100 percent of the debt if the account owner stops paying. The lender considers you both as equal partners on the debt, and you both owe all of it equally.Ask Erica

That student loan, therefore, is showing up on your credit report as well as your ex's. Such details as the amount that was first borrowed, the current balance and payment pattern are all listed in black and white.

As your former husband has been keeping the account in good standing, your credit rating may actually benefit. At 35 percent, payment history is the most important factor in a FICO score. However, it sounds as though the remaining balance is still substantial. That's a problem for you because outstanding debt in relation to the amount you can borrow is the second most important factor in a FICO, at 30 percent of your score. That's probably what's driving your rating down.

When you apply for a new loan, the creditor will gauge its risk level in lending to you. It will look at your credit reports, scores and income to make a smart decision. So when you applied, the credit union rejected you for the combination of those considerations. Based on the hard numbers, it most likely didn't look like you could afford to borrow more — probably because of the weight of that huge law school debt.

And that leads me the second problem with co-signing: It's pretty hard to get off the ride once it's in motion.

The bank granted the student loan to your ex-husband because of your guarantee. It was your promise to them that if he failed to pay, you'd do so. Based on that agreement, they forked over the cash. Now you want out? Not likely. At least for the initial lender.

You may have a way out, however. If another bank assumes the loan, but this time in only your ex's name, you can get off the hook. In other words, refinance the thing. To do so, your ex can approach the same lender or a different one and ask if to roll over the loan into a new one. In that case, the original debt would be satisfied, and you'd be in the clear. It would be advantageous for your credit report and scores, too.

Ask your ex if he would be so kind to try to do that for you. Assuming his personal credit rating is good and that he's making excellent money, there's a decent chance he can make that happen. Then you can return to the credit union (or any other financial institution) and attempt to finance the new car again once the original loan has been noted as paid and closed on your credit report.

And if your ex refuses or no one will refinance the loan? Either wait until the balance is lower,  earn more money so a lender feels more confident in doing business with you or save up for a larger down payment. Or find some other way to get a working vehicle. For example, consider a more affordable model or use savings to purchase a used car without having to borrow or ask anyone for help.

Got a question for Erica? Send her an email.