What Happens if I Have a Co-signer on a Car?

Having a co-signer on a car loan is a common arrangement that allows individuals to secure vehicle financing when they might not otherwise qualify. This setup creates a shared financial commitment between the primary borrower and the co-signer. This article explores the aspects of a co-signed car loan, from defining roles to navigating financial and procedural responsibilities.

Defining the Co-signer Relationship

A co-signer on an auto loan is an individual who agrees to take on equal legal responsibility for the debt if the primary borrower is unable to make payments. This differs from a co-borrower, who typically shares both the financial obligation and ownership of the vehicle from the outset. While a co-signer is fully liable for the loan, their name generally appears only on the loan contract and not on the car’s title, meaning they do not have ownership rights to the vehicle.

Lenders often require a co-signer when the primary applicant has a limited credit history, a low credit score, or a high debt-to-income ratio. The co-signer’s strong credit history and financial standing help mitigate the lender’s risk, increasing the likelihood of loan approval and potentially securing a more favorable interest rate. For example, a co-signer typically needs a good to excellent credit score, often 670 or higher, along with sufficient income and a manageable debt-to-income ratio, ideally below 50%. The co-signer essentially leverages their established credit profile to help the primary borrower obtain the necessary financing.

Shared Financial Obligations

Both the primary borrower and the co-signer share financial responsibilities for a co-signed car loan. The primary borrower is directly accountable for making timely monthly payments, maintaining adequate vehicle insurance, and caring for the car. Failure to meet these obligations can trigger the co-signer’s responsibility.

The co-signer assumes an equally binding responsibility to repay the loan if the primary borrower defaults. If the primary borrower misses payments, the lender can pursue the co-signer for the full amount due. The loan’s payment history, whether positive or negative, is reported to credit bureaus for both the primary borrower and the co-signer. Missed payments can severely damage the credit scores of both parties, making it more challenging to obtain future credit.

Consequences of missed payments or default include collection efforts by the lender. If payments cease, the vehicle can be repossessed. After repossession and sale, if the proceeds do not cover the outstanding loan balance, the co-signer remains liable for any deficiency balance. This deficiency can range from several hundred to several thousand dollars, depending on the car’s value and the remaining loan amount.

Navigating the Co-signed Car Loan

Managing a co-signed car loan involves specific procedures for changes. Selling a co-signed vehicle typically requires the involvement and agreement of both the primary borrower and the co-signer. Both names may be on the loan agreement, and in some cases, the title, necessitating joint action to transfer ownership and satisfy the loan. Sale proceeds are generally used to pay off the outstanding loan balance, releasing both parties from their obligations.

Removing a co-signer from a loan is achieved through refinancing the loan solely in the primary borrower’s name. This process involves securing a new loan to pay off the existing co-signed loan. To qualify for refinancing without a co-signer, the primary borrower usually needs an improved credit score, a stable income, and a favorable debt-to-income ratio. Some lenders may also offer a “co-signer release” option after a certain number of on-time payments, though this is not universally available and depends on the original loan terms.

If the primary borrower passes away, the co-signer remains legally responsible for the loan payments. The deceased’s estate may be responsible for the debt, but if the estate cannot cover it, the co-signer must continue making payments or face the consequences of default, including repossession. Conversely, if the co-signer passes away, the primary borrower remains fully responsible for the loan. While the death of a co-signer usually does not automatically trigger an immediate demand for full repayment, the primary borrower should continue making payments as usual to avoid default.