Co-signing an auto loan for a relative or friend requires careful consideration. If the person can't afford the car or has credit that is too poor to qualify without you, the risk of default may be too high. If you already co-signed and the borrower is not making regular payments, the vehicle can be repossessed. If this happens, you are liable to the finance company to pay any remaining unpaid balance on the account.
Co-signer
Co-signing on an auto loan so the buyer of the vehicle can qualify for approval is the same as carrying the debt yourself. Even though you are responsible for the loan payments if the borrower doesn't pay, you usually do not receive the benefit of using the car. The federal government requires lenders to give co-signers a statement prior to finalizing the loan that states their liability in the transaction. In some states, the lender is allowed to attempt collection of the debt from you without first asking the borrower to pay.
Repossession
If the borrower fails to make one payment, then the loan is in default. The creditor may repossess the car without notice, but more than likely it has attempted to contact the borrower to resolve the balance due without taking the vehicle. You may not know about the default until you receive a demand for payment of the loan. When co-signing the loan, you can ask the creditor to add a clause to the contract that requires you to be contacted as soon as payment has not been made.
Deficiency Balance
After the car is repossessed, the creditor may sell it at an auction. If the vehicle is sold for less than the amount owed on the loan, then a deficiency balance for the difference remains on the account and must be paid. To collect the balance, the creditor can sue you and the borrower and receive a deficiency judgment. With this court order, the creditor can attempt to collect from you in several ways, such as placing a lien on your home or garnishing your wages or bank accounts.
Credit Impact
You may lose money if you are required to pay as a co-signer after a car is repossessed. In addition, the impact to your credit can last seven years, and your score can drop by 100 points or more. With the repossession and deficiency judgment on your credit report, it may be difficult to qualify for credit cards, a mortgage or a car loan. As time passes, you may be approved for new credit, but banks can charge you a higher interest rate because of your history.
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