What Does It Mean When You Co-Sign for a Car Loan?

Co-signing an auto loan involves assuming full responsibility for another person's loan. The arrangement comes with financial risks, and it could damage the co-signer's credit rating. The main difference between co-signing an auto loan and taking out your own auto loan is that you won't have any rights to the vehicle that the loan buys.

Function

You become a guarantor if you co-sign an auto loan, which means you guarantee repayment of the loan if the borrower doesn't repay it. If necessary, the auto lender can sue you to collect the unpaid amount. The payment history for a co-signed loan appears on both the borrower's and co-signers credit reports. Therefore, any late payments can negatively affect the credit ratings of both parties. That's one reason the U.S. Federal Trade Commission warns consumers to think twice about co-signing auto loans.

Repayment

The FTC indicates that many co-signers eventually have to repay loans for borrowers, so co-signing also involves ensuring you can afford the payments before you agree to become a co-signer. Figure out how much you could pay on an auto loan each month, while you continue to pay your other bills. Car buyers usually repay auto loans in 36 to 60 months. The longer borrowers take to repay their loans, the lower the monthly payments will be. However, borrowers also pay more in interest charges if they stretch out the payments over a longer period.

Property Rights

Co-signers take on the responsibility of an auto loan with none of the potential benefits, according to the Illinois Legal Aid organization. The organization indicates that co-signers dont have any rights to the vehicle the borrower buys with the loan, even though the co-signer is equally responsible for repaying the loan. As a result, a co-signer cant take the vehicle away from the borrower for his own use if the borrower isn't making payments on it.

Repossessions

The lender can repossess a co-signed vehicle if both the borrower and co-signer fail to make payments on it. A repossession would damage the co-signer's and borrower's credit rating, and it would remain on their credit reports for seven years. Furthermore, they still may be obligated to repay the remaining balance on the loan after the lender repossesses the vehicle. Lenders often sell repossessed vehicles to recoup as much of the loan balance as possible. However, the lender can require the co-signer and borrower to pay the difference if the vehicle sells for less than they owe on the loan.