What Happens If You Cosign a Car Loan and the Person Doesn’t Pay?

Cosigning a car loan involves taking on significant financial risk, as it means sharing responsibility for the debt. When the primary borrower fails to make payments, the cosigner becomes fully liable for the loan. Understanding the potential consequences before cosigning is important to avoid future difficulties.

The Cosigner’s Primary Responsibility

A cosigner on a car loan is not merely a guarantor but an equally responsible party for the debt. This arrangement creates a legal obligation known as joint and several liability. Under this principle, the lender can pursue repayment from either the primary borrower or the cosigner, or both, for the full amount of the debt. The lender is not required to exhaust collection efforts against the primary borrower before turning to the cosigner.
The cosigner’s obligation is as absolute as the primary borrower’s, making them fully accountable for the loan balance, including any accrued interest and fees.

Immediate Financial and Credit Implications

When the primary borrower misses car loan payments, the cosigner’s personal finances and credit score are immediately affected. Lenders typically report missed payments to major credit bureaus once they are 30 days past due. This negative information appears on the credit reports of both the primary borrower and the cosigner.

A single late payment can cause a credit score to drop significantly, potentially by 50 to over 100 points, depending on the cosigner’s existing credit history and score. These derogatory marks, such as 30-day, 60-day, or 90-day late payments, can remain on a credit report for up to seven years from the original delinquency date. This credit damage can hinder the cosigner’s ability to secure future loans and may result in higher interest rates on any approved credit.

Lender Actions Following Default

Once a car loan goes into default, a lender typically initiates a series of actions to recover the outstanding balance. The process usually begins with late payment notices and phone calls to both the primary borrower and the cosigner. If payments remain unmade, the account may escalate to the lender’s collection department or be transferred to a third-party collection agency.

Many loan agreements include an acceleration clause, which allows the lender to demand the entire outstanding loan balance be paid immediately upon default. This means the lender can require full repayment, not just the missed payments, often after a period of 60 to 90 days of non-payment.

Repossession and Deficiency Judgments

If loan payments are not brought current, the lender may proceed with repossessing the vehicle. While some lenders might wait until two or three payments are missed, a car can be repossessed after just one missed payment, as this constitutes a breach of the loan agreement. Repossession typically involves the lender or a designated agent seizing the vehicle, often without prior warning, although state laws may require notification in some cases.

After repossession, the vehicle is usually sold, often at a public auction or private sale, to recover some of the outstanding debt. The proceeds from the sale are applied to the loan balance, but these sales frequently do not cover the full amount owed. A “deficiency balance” then arises, which is the difference between the remaining loan amount, plus repossession costs (such as towing, storage, and auction fees), and the amount the vehicle sold for.

The cosigner remains legally responsible for this deficiency balance, even after the vehicle has been repossessed and sold.

Navigating the Situation and Potential Outcomes

When facing a primary borrower’s default, a cosigner has a few options to consider to mitigate the financial fallout. Communicating directly with the primary borrower to encourage them to resume payments is a logical first step.

The cosigner can also proactively contact the lender to explore potential repayment solutions, such as negotiating a deferment, restructuring the loan terms, or arranging a voluntary surrender of the vehicle. While voluntary surrender still negatively impacts credit, it may be viewed somewhat less unfavorably than an involuntary repossession.

If the deficiency balance remains unpaid after repossession and sale, the lender may pursue legal action against both the primary borrower and the cosigner to obtain a judgment. A civil judgment can have severe consequences, including wage garnishment, where a portion of the cosigner’s earnings is legally withheld to repay the debt. Federal law generally limits wage garnishment for consumer debts to 25% of disposable earnings or the amount by which disposable earnings exceed 30 times the federal minimum wage, whichever is less. Additionally, a judgment can lead to bank account levies or liens on property, and it typically remains on the cosigner’s credit report for seven years from the filing date, further impacting their financial standing and access to future credit.