The Dangers Of Co-Signing An Auto Loan


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By nature, we are a giving group of people. We really want to help people when they are down on their luck; it is what we do as Americans, right? So you have a friend or relative who asks you to “just co-sign” a car loan so he or she can get around, take the kids to daycare, and get to work. It sounds easy and you believe he or she will do the right thing. Sadly, too often, these scenarios play out with a loss of money and a loss of the relationship.

Of course, there are exceptions. My Dad signed for my first car loan with me at 18-years of age. I co-signed for my son when he was 19-years old. Co-signing a loan for someone with no credit is one thing, but co-signing for someone with bad credit is another altogether.

Co-Signing an Auto Loan

Understand before you co-sign a loan, you are legally obligated to pay the balance of the loan if the other party defaults. Yes, you are just as obligated to pay as the person you signed for. That means the lender can go after you, force you to pay, and even get a judgment to attach property you already own, such as your home.

You may have perfect credit when you co-sign a loan, but if that loan defaults, you will have many consequences to pay. In a default, your credit score will plummet, forcing you to pay higher interest rates in the future. You may opt to sue the person you co-signed for, but odds are good, he or she has nothing to lose, so it turns out costing you more.

Odds are good, too, that the relationship with the person you co-signed for will be ruined. You are going to get frustrated, usually after the “I can’t believe he or she did this to me” syndrome, and you’ll get the “I’m doing the best I can” from the other party. I have seen this too many times.

Something else to think about…the loan you co-sign could affect your ability to get a loan yourself if you need to. Make no mistake; the loan you co-sign will be on your credit report. It will count against your debt-to-income ratio and will look like your debt obligation completely, as far as future lenders considering a loan.

Then there is insurance. If a person is struggling to make a car payment that you are on the hook for, he or she may opt to stop making their insurance payments. Should the vehicle get stolen or totaled out, the lender still expects payments and you are on the hook.

Three Ways to Protect Yourself

If you should decide to co-sign a loan, what can you do to protect yourself?

  1. Set yourself a reminder of when the payment is due, and make the other party give you proof the payment is made. Payments are due “on or before” the due date, not sent on the day it is due unless it is being paid electronically.
  2. Call the lender and ask that a note be made on the account that as the co-signer, you want to be notified immediately if a payment is 5 days past due.
  3. Call the insurance company and ask to be called ASAP if the insurance lapses.

These things can save your credit and the relationship with the person for whom you co-signed.

Being proactive, even with children, is always a good idea. The main thing to realize before you sign with someone is that a contract is a legal, binding obligation, just as if you were getting the loan yourself. In the eyes of the law, you are.

Photo Copyright: michaeljung/Shutterstock
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Houston Guy
Jerry,

Thank you for your article about The Dangers Of Co-Signing An Auto Loan. In addition to the concerns you mentioned, I learned another pitfall of co-signing, in this case with my young adult daughter. I co-signed for her for a car loan through a credit union that I had already financed several loans over about 20 years. I had a pick up truck being financed through the credit union at that time. After making her payments on time for the first year or so of a five-year note, she got into some money trouble and missed a payment. When this default first occurred, no one, certainly not her, told me there was a problem.

When the credit union finally notified me, I contacted them without delay. That was when I got my surprise. The credit union told me that, because I had the other loan with them for my truck, they had cross-collaterized my truck with her car note. The credit union told me that they had the legal authority to repossess my truck as well as her car! My truck note was current, but that did not matter to the credit union. Because my daughter had moved to another county, it was going to be easier for them to find and repossess my truck than would be the case with her car.

I was left with no choice but to go make the payments necessary to bring my daughter's car note to a current status, as I could not feel comfortable driving around and feel like my truck might be repossessed at any time. I have since straightened things out with my daughter, but I will be even more careful the next time someone asks me to co-sign for them.
The Car Pro
Thanks for sharing your story. I’ve heard of this before, but have never seen it actually executed. To me, the co-signer should be notified at 5 days if a payment is late.

Jerry Reynolds
GJ
I have never and will never co-sign. I have also seen it go bad for friends and family and it does ruin relationships. My parents would not co-sign for me when I was younger but did help with a down payment. I did not understand that at the time but certainly do now. Case and point my son knew and knows that I do not co-sign. He called me one day multiple times from a shady dealer in Grapevine, TX tying to buy a car. I reminded him I do not co-sign, but I could help with a down payment on a cheaper car. To sum it up. He bought the car, got tired of his job, and quit. 8 months later he called me and said his car was repo'd. Credit was ruined. The highlight of this story however is 2+ yrs later his credit is back up and he is a wiser person.
The Car Pro
GJ-

Thanks for sharing your story. I am glad your son learned a valuable lesson early!

Jerry Reynolds