What Happens If I Cosign a Car Loan?
Before cosigning a car loan, understand your obligations, credit risks, and how to potentially be released from the agreement.
Cosigning a car loan involves agreeing to be legally responsible for the debt if the primary borrower cannot make payments. This arrangement often arises when the primary borrower has a limited credit history, a low credit score, or a high debt-to-income ratio, making independent qualification difficult. A cosigner with a strong credit history can reduce risk for lenders, helping the primary borrower secure financing or more favorable terms.
Understanding Your Obligation
Cosigning a car loan places you in an equally accountable position for the loan payments alongside the primary borrower. If the primary borrower misses payments or defaults, the lender can pursue the cosigner for the full amount owed. This can involve collection efforts, direct demands for payment, or legal actions like lawsuits or wage garnishment.
You are legally obligated to repay the entire loan amount, including late fees and collection costs, even if the primary borrower stops making payments. Lenders can initiate collection efforts against you without first attempting to collect from the primary borrower.
If the loan defaults, the vehicle may be repossessed. Even after repossession and sale, you remain liable for any deficiency balance. This deficiency is the difference between the outstanding loan balance (including fees and sale costs) and the amount the lender receives from selling the vehicle. A cosigner does not gain ownership rights to the vehicle unless explicitly listed as an owner on the title.
Impact on Your Credit Profile
Cosigning a car loan directly influences your credit report and score, as the loan’s payment history appears on your credit reports. This impacts your debt-to-income (DTI) ratio, a key metric lenders use to assess your ability to manage existing debts. A cosigned loan adds to your overall debt burden, potentially limiting your capacity to qualify for new credit, such as a mortgage or another car loan.
When the primary borrower makes timely payments on the cosigned car loan, this positive behavior is reflected on your credit report, which can improve your credit score. This can also diversify your credit mix. However, any late payments, missed payments, or default by the primary borrower will negatively impact your credit score and history.
A hard inquiry is recorded on your credit report when you apply to cosign for a loan, which can cause a slight, temporary dip in your credit score. This initial reduction is minor, but your credit profile’s long-term health depends on the primary borrower’s payment performance. If the loan defaults, negative marks, including repossessions, can remain on your credit report for up to seven years, severely affecting your ability to obtain credit.
Options for Cosigner Release
While cosigning a car loan establishes a significant financial commitment, specific avenues may allow for your release from the obligation. Cosigner release is not an automatic right and often depends on the lender’s policies and the primary borrower’s improved financial standing.
One common method for cosigner release is refinancing the loan solely in the primary borrower’s name. For this to occur, the primary borrower must qualify for a new loan based on their own creditworthiness and income. The new loan then pays off the original loan, effectively removing the cosigner from the obligation.
Another straightforward option is the complete payoff of the loan. Once the outstanding balance, including any accrued interest, is paid in full, both the primary borrower and the cosigner are released from their responsibilities. This can be achieved through a lump sum payment or by continuing regular payments until the loan term concludes.
Selling the vehicle is also a viable option for cosigner release. If the sale proceeds are sufficient to cover the entire outstanding loan balance, the loan can be paid off, releasing both parties. However, if the vehicle’s market value is less than the loan balance, the difference, known as negative equity, would need to be paid out-of-pocket to clear the debt. Some loan agreements also include a specific “cosigner release” clause, which permits the cosigner to be removed after a certain number of on-time payments by the primary borrower, provided other conditions are met.