My father defaulted on his loan, and now I have to pay more interest on mine?

Thursday, 13 May 2010 20:58

Q. This is not your normal car loan situation. Last spring I was in the market to buy my first car. I looked around, found the one I wanted and got pre-approved for a loan on my own. My father went along with me to the dealer. Test drive ........ I want it!. In the finance room they told me that I could get 1% less interest if I let my father co-sign for me. So I went along with that putting my pride aside.

This month I got a call saying that my father is behind on his payments to the same lender, and they will take my payment to make his if necessary! My father has recently been laid off from his job because of the economy and knows he is going to go down. I have contacted other banks to refinance and they want $2,000 down! Do I have any other options to not go down with the ship? I have never missed a payment on anything and my credit is fine. Please help!

A. When someone defaults on payments, they have to deal with Bank’s hard collection department. These are the employees, which are responsible for bringing the defaulted cash back into the Bank. They are tough on you, and you have to be tough on them. They'll try to use every way possible to get the money, and well, you take their offers easy.

Now why you have to deal with your father’s debt. Interest rate compensates the bank for the risk it bears by lending money. What happened is that you got a better rate because your dad reduced the risk. Now that the dad's risk went 100% they have to reduce it through different means, and that's done by either asking for more collateral or down payment, or by simply increasing the rate.

Try to use your credit history with them and negotiate the terms. Offer them a 0.1% rate increase and say otherwise you will move the loan to a different bank. Banks make money by lending and if they lose customers, they won't make money. Also keep in mind the last thing they want is to replace your loan with your car and try selling it, which isn't what banks normally do. Emphasize that to get more concessions.

Keep in mind, you are not legally responsible for paying your father’s debt (if you did not cosign anything with him). However, the collection department wouldn’t mind if you paid some of that. But no matter how much they suggest, it is up to you if you want to take care of dad’s finances.

I am finance professional and I would do that. Although I am not sure how much confidence you can project in negotiation, I suggest you try.

Good luck!

Moni.