What Is a Co-Sign Car Loan in California?

Banks in California may require a co-signer for potential car buyers who have credit history blights or a lack of credit history. A co-signed loan has two signatures on it, one for the buyer and one from another person who won't use the vehicle. Before you enter into a co-signed loan, learn a little more about how the contract will affect both parties.

Defining a Co-Signer

California law defines a co-signer as someone who signs the loan or lease for a motor vehicle but does not take possession of it. In other words, they take the responsibility for the loan, but do not benefit from using the vehicle in question. The co-signer will be held liable for the payments if the car's owner does not repay the loan.

When Co-Signers Are Needed

California drivers who need a vehicle but cannot get a car loan because of credit problems or little credit history can ask someone they know, usually a close friend or family member, to sign with them for the car loan. The bank or lender then looks at both individuals' credit ratings when making the determination about the loan approval. If the co-signer has a strong credit score, the likelihood of getting approval for the loan is higher. This scenario often occurs when a parent co-signs for a loan on behalf of their teenage driver.

Benefits of Co-Signed Loans

The main benefit of a co-signed loan in California is for the car's owner. By using a co-signer, the owner is able to purchase a car using a car loan even when his or her credit is too poor to warrant such action. There is not any benefit to the co-signer except the potential satisfaction of helping a friend or relative in need.

Dangers of Co-Signed Loans

Co-signing for a loan is a financial risk. The Federal Trade Commission warns co-signers that they are taking a risk that lenders were unwilling to take. There are two strong dangers for the co-signer in a California co-signed loan. The first is that the car's actual owner will default on the loan payments. If this occurs, the co-signer is held responsible for the repayment. Yet, the co-signer may not be aware that the loan is not being paid, and eventually this could cause credit problems. A second danger is in the way the state interprets ownership and liability in crashes. In California, a co-signer is viewed as a liable party if someone is injured due to a collision involving that vehicle.