If you're not driving a car when it crashes, you're not usually liable for damages. There are exceptions -- such as if you knowingly let someone intoxicated use your car -- but generally the responsibility belongs to the driver, not the owner. If you cosigned an auto loan, you shouldn't be liable for damages if the primary borrower is involved in an accident and gets sued. However, if the borrower defaults on the loan because the accident and lawsuit left her in a deep financial hole, you will be responsible for making the loan payments.
Reasons to Cosign
When you cosign a loan, you assume one specific responsibility: agreeing to pay off the loan if the primary borrower defaults. Suppose, for example, that your sibling's credit is too poor to land an auto loan. You, by cosigning, commit your good credit to the loan. That may be enough to get the lender to approve it. Unless you also put your name on the title, you have no other liability for what your sibling does with her car.
After the Crash
Cosigning doesn't make you liable for the primary borrower's bad driving, drunk driving or driving without insurance. You are liable for the loan payments, however, which can cause problems after an accident. If the car gets totaled in a crash, and the insurance doesn't pay off the auto loan, the borrower could decide to walk away rather than pay off the loan. Likewise, if the borrower is sued for damages and has to pay a lot of money to settle the suit, she might not have enough money left to pay the car loan. In these cases, the lender can come after you for the payments.
If the borrower defaults, you can be sued for any unpaid loan amounts if you don't bring the loan current on your own. If the lender wins in court, the court can garnish your wages, levy your bank account or put a lien on your house to ensure the car loan is paid off. Any legal action against you goes on your credit report, as do the original delinquent loan payments. Even though you aren't the one who defaulted, that's not how it will look to anyone who reads your credit report.
Weighing the Risks
When you cosign a loan, you're putting your faith in a borrower the lender thinks is a bad credit risk. Even if there's no accident, it's possible the borrower might default, run out of money or file bankruptcy. Ask yourself before you cosign any loan if you want to take the risk. Also consider whether you can afford to pay off the loan if you have to. In almost every case, you're better off just saying no.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.