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4 min read. Published September 30, 2022
Dan Miller Written Dan Miller Written by Points and Miles Expert Contributor Dan Miller is a former contributor to Bankrate. Dan was a frequent contributor to loans, home equity, and debt management in his writing. The article was edited by Rashawn Mitchner. Edited and written by Associate loans editor Rashawn Mitchner, who was a former associate editor at Bankrate. The Bankrate promise
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We are compensated in exchange for placement of sponsored products and services or through you clicking specific links on our website. So, this compensation can affect the way, location and in what order products are displayed within the categories of listing and categories, unless it is prohibited by law for our mortgage or home equity products, as well as other home loan products. Other factors, such as our own proprietary website rules and whether the product is available within your region or within your personal credit score could also affect the manner in which products appear on this website. While we strive to provide a wide range offers, Bankrate does not include details about each credit or financial product or service. Co-signing an auto loan for someone you love is a major financial decision. This means that you’re legally responsible for loan payments if the person whom you’re cosigning for does not do so. Along with putting your cash at risk when you co-sign an auto loan as well, you’re also putting at risk your credit. If the loan gets in the way of default, or the vehicle is ultimately repossessed and your credit is damaged, even if you have a long track record of paying all your obligations punctually. How auto repossession works When you contract a lease agreement or take out a loan for the purchase of a vehicle however, you do not actually own the car. The lender retains the title of the car until you have fulfilled your obligations and pay off the loan. In the paperwork you signed when you drove away in the vehicle, you granted the lender an option to seize the car if you cease paying the loan. The lender will typically only take possession of cars in the last instance, if you’ve stopped paying and they believe there’s little chances that you’ll ever resume payments. Many lenders would rather receive payment instead of having to go with the stress of bringing the car back. If the lender does decide to repossess your vehicle, they are generally not required to give you any kind of notice. The lender could send a driver to remove the vehicle or hire a tow truck. If your vehicle has a remote start, the lender could also block your ability to start the car. While laws vary by state, a lender is typically allowed to come onto private property to take possession of a car. However, it’s usually prohibited to break into the garage or cause damage to the property. What happens when a co-signer is unable to take possession of the vehicle? It’s important to be aware that making efforts to cure any defaults on a loan yourself, or “taking matters in your own hands” is not considered to be a legitimate substitute for legal action in most states. The courts have this law to avoid the kind of physical confrontations that can occur in the event that you try to seize your friend’s vehicle, so let the dealer or the bank repossess the vehicle. How the credit of co-signers will be affected by repossession a co-signer makes you legally responsible for the debt. In co-signing the loan you have agreed with the lender that you would ensure that the payments were paid even if the original borrower failed to pay the payments. So, reposession or late payments will appear on your credit report, too. If you are the co-signer on the car you’re the one in the position of being responsible for the debt until it’s paid in full. Credit scores, your available cash , and your relationship with your delinquent co-signer are at risk. If things go wrong and you are not careful, all three issues could be affected. These are a few reasons that you should be extremely cautious when agreeing to sign a co-signer. Be cautious about who and who you co-sign to. It’s a good idea to only sign for those who are close friends or family members you are confident. It is ideal to choose those who have a stable financial situation. To protect yourself from the event of a crisis, you may be thinking about creating an independent contract between you and the principal borrower. This contract would define your expectations as well as the obligations of each party. After the document has been agreed to by both parties have it notarized. Rights as a co-signer As as a co-signer you are legally responsible for the debt, however, it is not legally binding on you are not legally responsible for the debt . You have no legal right to ownership of the car or other property. If the borrower who is the primary one falls in arrears with their car payments and you think you have the right to seize the car on your own however you don’t. One option you might have to safeguard yourself while co-signing for a loan is to make sure you are one payment ahead. Contact the lender and find out what amount is in arrears (if any) and pay it and then make another payment. In the event that your co-signer pays late again, any late payments will still count toward the balance and not affect your credit. It is just a matter of staying contact with the lender and stay at least one month behind. Another option is to ask to be removed from the loan. The borrower who is the primary one must accept the release of cosigners, and they must also agree to the release of the cosigner. The lender will only give approval when the primary borrower proves that they are able to pay for the loan independently. Credit repair after repossession the repossession appear on your credit file will result in your credit score to decrease and can affect the ability to qualify for different types of loans. The repossession period is seven years long, so you want to do everything you can to ensure that the vehicle you co-signed for doesn’t get taken away. Based on your relationship with the principal borrower, you might be able to come to a settlement. You can try to request that they turn over ownership of the car in exchange for the rest of your payments. When the car is fully paid you may be able to sell it and recover some of your money. You could try to sue the borrower who was your primary lender to recover some damages however if they fail to make payments due the lender, then it is likely that they won’t pay. Even if you get a judgement against them, you’d need to be able to enforce it. It’s better not to allow it to get to the point of being able to enforce it. The bottom line is that co-signing a loan is a risky thing to do, and it puts your credit on the line. Before you co-sign for the auto loan or other type of loan take into consideration what you’ll do if the primary borrower defaults. Instead of co-signing, may consider working with them to look for alternatives that don’t require a cosigner. If you’ve co-signed for a loan and the borrower is behind on payments There are several options. It’s important to know that you don’t have the authority to seize the vehicle yourself. Instead, you’ll have to either work something out with the principal borrower or continue to pay the loan towards the lender. Learn more:
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Written by Points and Miles Expert Contributor Dan Miller is a former contributing writer for Bankrate. Dan covered loans, home equity and debt management in his work. The edit was done by Rashawn Mitchner Edited by Associate loans editor Rashawn Mitchner is a former associate editor at Bankrate.
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