A co-signer on a car loan is liable for the payment of the delinquent balance in the event the borrower defaults in his repayment obligations with the lender. In the absence of fraud on the part of the bank that issued the loan, the legal actions a co-signer can take in the event of delinquency are somewhat limited.
Function
In order to reduce their credit risk for loans to potential borrowers who either have a poor credit record and/or no credit or employment history, many lending institutions require a co-signer as a condition for making a car loan.
Co-signer Liability
In the event of a delinquency, the contractual liability of the co-signer is absolute: It is not contingent upon the lender's first seeking recourse against the borrower. Once the borrower breaches the repayment terms and conditions of contract with the lender, the co-signer assumes all liability for payment of the loan. Some car loans may contain an acceleration clause that gives the bank the right to demand the remaining balance due in the event a scheduled payment is delinquent.
Terms of the Agreement
All parties to the car loan agreement (borrower, co-signer and lender) are bound by the terms and conditions of the contract. A co-signer may have a right of action against the lender if they do not comply with the terms of the loan. For example, some loan agreements may have a cure provision that allows the borrower or co-signer the ability to cure the default by tendering the missed payment within a specified number of days after it was due. If the lender fails to abide by the cure provision, the co-signer would have a right of action against the bank for breach of contract.
Notice Requirements
Many loan contracts contain notice provisions that obligate the lender to provide written notice to the borrower and co-signer in the event of a default. If the bank fails to timely notify the co-signer of a delinquency prior to declaring the loan in default, the co-signer would have an action against the lender for breach of contract. Compliance with the contractual notice provisions would have particular significance if the co-signer had been able to exercise his right to cure the default and avoid the consequences of any acceleration clause.
Action Against the Borrower
A co-signer may have an action against the borrower for fraud if the borrower made fraudulent representations to the co-signer related to his employment or ability to pay back the car loan in a timely manner. In addition, a co-signer may have entered into a binding legal contract with the borrower that specifies that in the event of a delinquency that triggers the co-signers repayment obligation on the car loan, the borrower will be liable to the co-signer for all amounts paid to the lender as a result of the borrowers delinquency.
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