If a borrower's credit history is poor, a strong co-signer can increase his chances of qualifying for a car loan. However, co-signing on a loan is risky. If the borrower doesn't pay, the lender can force you to do so. Generally, lenders accept co-signers who prove they can pay the loan installments. In verifying your ability to pay, where you live is less important than how long you've lived there. That said, individual dealerships establish their own protocols, so one lender may allow an out-of-state co-signer while another will not.
As a co-signer, you guarantee the borrower will pay the loan installments on time. If he does not, the lender can ask you to pay on the borrower's behalf. Because she will turn to you if the borrower doesn't pay, the lender needs to make sure you're good for the money. She will do so by putting you through various income and credit tests to verify your ability to pay. Generally, you need an excellent credit score, stable employment and an income that's capable of making the loan repayments.
It May Matter Where You Live
Although not as strict a requirement as the credit and income qualifiers, lenders place weight on your stability. In other words, they look favorably on co-signers who have lived at one address for five years or more. There are no hard and fast rules about where that address must be. Some lenders won't care. Others may stipulate an in-state address. Some companies set even tougher criteria, accepting only family members residing at the borrower's address.
Risks for Out-of-State Co-Signer
As a co-signer, you're on the hook for the debt. As an out-of-state cosigner, you may not have a handle on the borrower's financial difficulties until it's too late. Not all lenders contact you if the borrower misses a payment, so you might not find out about a default until it gets out of hand. By then, the borrower's delinquency has appeared on your credit report, damaging your score and limiting your future borrowing ability.
Other Out-of-State Considerations
In many financing setups, you, as co-signer, hold the title to the car. On the one hand, you have the power to sell it if necessary to pay off the loan. On the other hand, you are accountable for claims and must protect yourself with adequate insurance. As you're not the one driving the car, you may not hear about a crash until you receive the paperwork from the injured party's insurer.
A former real estate lawyer, Jayne Thompson writes about law, business and corporate communications, drawing on 17 years’ experience in the legal sector. She holds a Bachelor of Laws from the University of Birmingham and a Masters in International Law from the University of East London.