What Happens If I’m a Cosigner on a Car?

Cosigning for a car loan means taking on a significant financial responsibility alongside the primary borrower. This often occurs when an individual needs assistance to qualify for an auto loan due to limited credit history or a lower credit score. Lenders view a cosigner as an added layer of security, reducing their risk and potentially allowing the primary borrower to secure more favorable loan terms or approval. This article outlines the commitments and potential outcomes for cosigners.

Understanding Your Role as a Cosigner

When you cosign a car loan, you legally agree to share the financial responsibility for the debt with the primary borrower. This involves “joint and several liability,” meaning the lender can pursue either you or the primary borrower for the full loan amount if payments are not made. If the primary borrower fails to make payments, the lender can demand payment directly from you.

The loan appears on your credit report from establishment, reflecting a new debt obligation. This can impact your debt-to-income ratio and affect your ability to obtain new credit. While cosigning may not immediately alter your credit score, the primary borrower’s payment activity directly influences your credit standing. On-time payments can positively contribute to both your and the primary borrower’s credit history.

Implications of Loan Performance

The performance of the car loan directly impacts you as a cosigner. If the primary borrower misses a payment, the lender will contact them first, but if the issue persists, they will reach out to you, expecting you to fulfill the payment obligation. Late payments, even if just by 30 days, can significantly damage the credit scores of both the primary borrower and the cosigner. Negative marks from late payments or defaults can remain on credit reports for up to seven years.

If payments continue to be missed, the lender may escalate collection efforts, which can include contacting collection agencies. The lender can initiate legal action against both the primary borrower and the cosigner to recover the outstanding debt. A judgment against you could lead to wage garnishment or bank account levies.

If the loan defaults, the vehicle is subject to repossession. This action is also reported to credit bureaus and negatively affects both parties’ credit scores. Even after repossession, if the sale of the vehicle does not cover the remaining loan balance and associated costs, a “deficiency balance” will remain. Both the primary borrower and the cosigner are responsible for repaying this amount.

Options for Cosigner Removal

Removing yourself as a cosigner from a car loan is possible, though it often requires specific actions from the primary borrower.

Refinancing

The primary borrower can refinance the loan in their name alone. This requires them to have improved their credit score and financial standing since the original loan was taken out, demonstrating their ability to manage the debt independently. A new loan is then issued to pay off the old one, releasing the cosigner.

Selling the Vehicle

Another way to end the cosigner obligation is by selling the vehicle. The proceeds from the sale are then used to pay off the outstanding loan balance in full. If the sale price is less than the amount owed, the primary borrower must cover the difference to fully satisfy the debt.

Loan Payoff

The simplest method for removal is the complete payoff of the loan. Once the loan balance reaches zero, the cosigner’s responsibility automatically ends.

Cosigner Release Clause

Some loan agreements may contain a “cosigner release clause.” This clause allows for the cosigner to be removed after the primary borrower has made a certain number of on-time payments and meets other specified financial criteria. Reviewing the original loan documents is necessary to determine if this option exists. It is advisable to obtain official documentation from the lender confirming your release from the loan.