What Happens to the Cosigner If a Car Is Repossessed?

When an individual needs assistance securing an auto loan, they might turn to a cosigner. A cosigner is someone who agrees to be equally responsible for the loan debt if the primary borrower fails to make payments. This arrangement often helps the primary borrower obtain financing or secure more favorable loan terms, especially if they have limited credit history or a lower credit score. Should the primary borrower default on the loan, the vehicle can be repossessed by the lender, who takes back the car to recover their financial loss. This action typically occurs after several missed payments, though in many jurisdictions, a lender can repossess a vehicle without prior warning once the loan is in default.

Cosigner’s Financial Obligation

A cosigner assumes full financial responsibility for an auto loan, even if they do not possess or use the vehicle. If the primary borrower defaults and the car is repossessed, the cosigner remains legally and equally obligated for the outstanding debt. This responsibility extends beyond the initial loan balance to include various associated costs.

After repossession, the lender typically sells the vehicle, often at a public auction. However, the sale proceeds rarely cover the entire remaining loan balance. The difference between the amount owed on the loan and the amount the car sells for, plus any additional expenses, is known as a “deficiency balance.”

This deficiency balance is a significant financial burden that falls on both the primary borrower and the cosigner. It includes not only the remaining principal and interest but also various fees incurred by the lender. These fees can encompass towing charges, storage costs for the vehicle, and expenses related to the auction or sale process.

For example, if a car loan has an $8,000 balance at the time of repossession, and the vehicle sells for $5,000, leaving a $3,000 gap, the lender will add repossession and auction fees, which could range from a few hundred to over a thousand dollars. This increases the total deficiency, making the cosigner liable for the entire escalated amount. State laws generally permit lenders to pursue this deficiency from either party, emphasizing the cosigner’s direct and equal accountability.

Credit Impact on the Cosigner

A repossessed vehicle impacts a cosigner’s credit report and credit score. As a cosigner, your credit history is directly linked to the loan, meaning that any missed payments leading up to the repossession, as well as the repossession itself, will be reported to major credit bureaus. This adverse information appears on your credit file.

The presence of a repossession on a credit report is a derogatory mark that can lower a credit score. This negative entry remains on the credit report for up to seven years from the date of the first missed payment that led to the repossession. Its long-term presence can hinder a cosigner’s ability to obtain new credit.

Future borrowing opportunities can be affected, as lenders view a repossession as an indicator of increased risk. This can result in denials for new loans, such as mortgages or other auto loans, or lead to higher interest rates and less favorable terms if credit is extended. While credit reporting laws mandate accuracy, a legitimate repossession cannot be simply removed.

Post-Repossession Process for Cosigners

Following a car repossession and the determination of a deficiency balance, the lender will contact the cosigner. Written notices inform the cosigner of the repossession and detail the outstanding deficiency amount. These notices also outline the cosigner’s rights, such as the option to redeem the vehicle by paying the full loan balance and fees, or to reinstate the loan by catching up on past-due payments.

The Uniform Commercial Code requires the sale of the repossessed vehicle to be conducted in a “commercially reasonable manner.” This means the lender must make a good faith effort to sell the car for a fair market value, though auction prices are often lower than retail values. The cosigner has a right to be informed of the sale’s details, including whether it will be a public auction or private sale, and its date, time, and location.

Should a deficiency balance remain after the sale, the lender will pursue its collection. The cosigner can address this debt by paying the full amount directly to the lender. Alternatively, negotiating a settlement for a lump sum payment lower than the total owed is often possible. If the debt remains unpaid, the lender may sell the deficiency to a collection agency, leading to collection attempts and potential legal action. Lenders can file a lawsuit to obtain a judgment against the cosigner for the unpaid balance, with the timeframe for such actions varying by state law.