When you take out a collateral secured loan, the lender typically requires at least one of the borrowers to have an ownership interest in the property being financed. However, borrowers and property owners are not always one and the same and, in theory, a lender may allow someone to take out a loan secured by a property that he does not own, if the property owner agrees to the lien being placed.
Security Interest
When you take out an automobile loan your lender places a lien on your vehicle. In order for the lender to place that lien, you must sign a security document as the property owner and give your consent for the placement of the lien. You cannot secure a loan without a property owner signing the a security document. However, while this document offers up the automobile as collateral for the loan, it does not place the vehicle owner under any obligation to repay the loan.
Loan
When you take out a loan, you sign a loan contract and agree to repay the debt under the terms of loan agreement. Nothing in a loan document says that the primary borrower or cosigner have to have an ownership interest in the automobile being financed. If you and the other cosigner fail to repay the loan, the lender can repossess the vehicle that secures the loan. Therefore, the collateral only plays a role in the loan once the loan goes into default.
Risk
When you fail to repay a loan, your lender can notify the credit reporting agencies about the delinquent debt, and the credit agencies can reduce your credit rating in order to let other lenders know that you have a history of defaulting on your debts. However, if you cosign on a car that you do not own, the lender cannot repossess any of your property when you default on the debt. Conventional logic suggests that you are less likely to refuse to pay a loan that you secure with your own property as opposed to a loan that you secure with someone else's property. Therefore, few lenders write loans on which neither cosigner has an ownership stake in the property being financed.
Considerations
People with poor credit or limited income often apply for automobile loans alongside cosigners who have good credit and good income. Adding a cosigner to a loan often makes it much easier to qualify for credit. However, when you cosign for the loan, it shows up as an obligation on your credit report and could make it more difficult for you to obtain credit in the future, as lenders may feel that you already have all of the debt that you can handle.
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