If you co-sign a loan and the primary borrower is unable to repay the loan, you are legally required to
A co-signer is a person who, in order to help the primary borrower qualify for a loan or obtain better loan terms, adds their information, including income and credit history, to another person’s loan application. Examples of co-signers include parents, relatives, and friends.
On the other hand, the co-signer assumes joint financial responsibility for the loan and agrees to repay it in the event that the principal borrower fails to do so. Before agreeing to co-sign a loan, it’s critical to comprehend the dangers involved and take precautions to keep yourself safe.
So you’re considering cosigning a car loan for a friend or family member. That’s awesome! You’re helping them out in a big way but it’s important to understand your rights and responsibilities before you sign on the dotted line.
What is a cosigner anyway?
A cosigner is basically a backup plan for the lender If the primary borrower (the person who actually takes out the loan) can’t make payments, the cosigner is on the hook That means you’re responsible for the entire debt, including interest and late fees.
What rights do cosigners have?
As a cosigner, you still have certain rights even though you’re not the one operating the vehicle. Here are a few things to keep in mind:
- You don’t own the car. This is important to remember, because even though you’re financially responsible for it, you don’t have any claim to the vehicle.
- You can be sued before the primary borrower. If the primary borrower defaults on the loan, the lender can come after you first. This is because you’re equally responsible for the debt.
- You can potentially be removed from the loan. Depending on the lender, the primary borrower may be able to release you from the loan using a form called a cosigner release. However, this can only be done at the primary borrower’s request, and the lender must approve it.
What to consider before becoming a cosigner
Cosigning a loan is a big decision, so it’s important to weigh the pros and cons carefully. Here are a few things to think about:
- The type of loan you’re cosigning for. Secured loans, like car loans, put collateral on the line. This means that if the primary borrower defaults, the lender can seize the car. If you’re cosigning for a secured loan, make sure you’re comfortable with the risk involved.
- Your financial situation. Lenders typically want to see cosigners with good credit and a steady income. If you don’t meet these requirements, you may not be able to cosign for a loan.
- Your relationship with the primary borrower. You should only cosign for someone you trust. Make sure you have an open and honest conversation with them about their ability to repay the loan.
Cosigning a car loan can be a risky proposition, but it can also be a great way to help someone you care about. Just make sure you understand the risks and responsibilities involved before you sign on the dotted line.
Here are some additional resources that you may find helpful:
- Consumer Financial Protection Bureau: https://www.consumerfinance.gov/ask-cfpb/should-i-agree-to-co-sign-someone-elses-car-loan-en-813/
- Bankrate: https://www.bankrate.com/loans/personal-loans/im-a-loan-co-signer-what-are-my-rights/
What lenders can’t do
A lender can’t force you to put your information on someone else’s loan. Additionally, they are not allowed to require certain individuals—like a spouse—to co-sign unless they are applying for the loan jointly.
Make sure you comprehend all of the loan terms and details and are comfortable with them before signing the loan contract. If you’re feeling uncomfortable or forced to sign, you should walk away.
If you experience an issue with a financial institution, you can submit a complaint with the CFPB.
The potential risks of co-signing an auto loan
Although you might not own the car with the primary borrower, you still bear the same responsibility for making sure the loan is repaid as a co-signer.
If the primary borrower doesn’t make their monthly loan payment, you will be asked to make the payment. Missed payments may also show up on your credit reports, lower your credit score, and make it more difficult for you to obtain credit in the future.
If you don’t make loan payments, the lender may also seize and sell the car, and based on state law, they may even file a lawsuit against you and the principal borrower to recover the unpaid balance.
Ex Salesman Warns About Cosigning A Car Loan – Cosigner Requirements
FAQ
How much rights does a cosigner have on a car?
Can a cosigner remove themselves from a car loan?
Does a cosigner have ownership rights?
Who owns the car if there is a co-signer?
What does a co-signer do on a car loan?
A co-signer who has a good credit history reduces the risk of lending to the primary borrower. The co-signer is legally responsible for paying the auto loan, meaning the lender might pursue collection efforts to recoup their costs on a defaulted loan. A co-signer is a borrower who agrees to accept the credit risk that comes with the loan.
Can a co-signer own a car?
When one person co-signs a loan for another person, they are not listed as an owner of the vehicle. The co-signer agrees to take over the responsibility of repaying the loan should that primary borrower fail to make their agreed payments. The co-signer has no legal claim to the vehicle and cannot use it unless permitted by the primary borrower.
What rights does a co-signer have in a secured loan?
The co-signer of a loan doesn’t receive the proceeds of the loan and has no title rights, ownership rights, possession rights, or repossession rights in the property of a secured loan (a car, a house, jewelry, electronics, etc.). A secured loan is simply a loan that’s backed by some kind of property.
Do co-signers have ownership rights?
A co-signer, by contrast, has no ownership rights to the home, car, or other financed property. A co-signer can guarantee secured loans or unsecured loans. A secured loan requires the pledge of collateral, such as the home or car being financed; if the borrower cannot repay the debt, this collateral is forfeited.