What Happens to a Cosigner When a Car Is Repossessed?

When an individual cosigns a car loan, they enter a financial arrangement where they agree to be equally responsible for the debt alongside the primary borrower. This often occurs when the primary borrower has limited credit history, and the cosigner’s stronger profile helps secure the loan or better terms. The vehicle serves as collateral, meaning the lender retains a security interest until the debt is repaid.

Car repossession is when a lender reclaims a financed vehicle because the borrower failed to meet loan terms, typically by missing payments. This action allows the lender to recover some of their financial loss. While the primary borrower loses possession of the vehicle, the financial obligation does not necessarily end there, especially for a cosigner.

The Cosigner’s Financial Obligations

After a car is repossessed, the cosigner remains fully responsible for the outstanding debt, not just a portion of it. The lender sells the repossessed vehicle, often at a public auction or private sale, to recoup the loan balance. However, the sale price rarely covers the entire amount owed on the loan.

The difference between the remaining loan balance and the amount the lender receives from the sale is known as a “deficiency balance.” This balance also includes various fees and costs incurred by the lender during the repossession process. These expenses can include towing and transportation fees ($50-$250) and daily storage fees ($20-$50). Lenders also add auction fees (10-15% of the sale price) and legal fees for repossession and collection.

For example, if $12,000 was owed on a loan, and the car sold for $3,500, with $150 in repossession and auction fees, the deficiency balance would be $8,650. The cosigner is legally obligated to pay this deficiency balance.

The Impact of Repossession

A car repossession significantly impacts the cosigner’s credit history, mirroring the consequences faced by the primary borrower. The repossession, along with any missed payments leading up to it, will be reported to major credit bureaus. This negative mark can cause an immediate and substantial drop in the cosigner’s credit score, potentially by 100 points or more.

This derogatory information remains on the cosigner’s credit report for approximately seven years. The seven-year period begins from the date of the first missed payment that led to the repossession, not the actual repossession date. Even if the deficiency balance is eventually paid, the repossession entry will still stay on the credit report for this duration.

The presence of a repossession on a credit report can create significant challenges in obtaining future credit or loans. Lenders view such an event as an increased risk, making it more difficult to qualify for new credit cards, mortgages, or other vehicle loans. If approved for new credit, the terms are likely to be less favorable, often including higher interest rates and stricter repayment conditions.

Navigating the Aftermath with the Lender

After a car is repossessed, the lender will communicate directly with the cosigner regarding the outstanding debt. The cosigner can expect to receive several types of notices from the lender. These include a notice of repossession, informing them the vehicle has been taken, and a notice of intent to sell, specifying the sale’s date, time, and location, usually an auction.

Following the sale of the vehicle, the lender will send a notice of deficiency. This document details how the deficiency balance was calculated, including the sale price of the vehicle and any additional fees or costs applied. The lender will then begin efforts to collect this remaining balance.

Collection actions commonly involve sending demand letters, making frequent collection calls, and potentially reporting the outstanding balance to credit collection agencies. If payment is not received, the lender may escalate efforts by pursuing legal action, such as filing a lawsuit to obtain a deficiency judgment against the cosigner. Such a judgment could potentially lead to wage garnishment or liens on other assets.

Upon receiving these communications, the cosigner has a few options for response. It is prudent to review all notices carefully and understand the amounts claimed and deadlines. The cosigner may attempt to negotiate a payment plan with the lender to pay off the deficiency balance over time. Alternatively, a lump-sum settlement for a reduced amount might be negotiable, particularly if the cosigner can demonstrate financial hardship.