The Laws on Cosigning for an Auto Loan

People with limited or bad credit often need a third party to sign on the dotted line. Married couples often appear to "have it all together" and may be asked to co-sign a loan for a friend or relative. But make no mistake: As a co-signer, you have no property rights to the vehicle. You're signing your name to the bill only. The only thing co-signers get out of the bargain is the warm, fuzzy feeling of knowing they helped someone out.

Co-Signer's Financial Liability

When someone asks you to co-sign a loan, you go to the auto dealership or bank and fill out the application. You authorize access to your credit report and provide income information proving you have the financial means to pay back the loan if the principal borrower defaults. According to the Federal Trade Commission, three out of four co-signed loans end up being paid back by the co-signer. Should the primary borrower default on the loan, you get to pick up the tab for them.

Creditor's Rights

The lender does not legally have to exhaust all means of collection against the borrower before coming after you for the bill. If the lender determines you have more money and assets to lose, they may just bypass collection efforts on the primary borrower and come after you for the balance. The lender may use an in-house collection department, third-party collection agencies or civil court to force payment.

Co-Signer's Rights

Before you sign off on the deal, make sure the lender agrees to notify you in the event the primary borrower misses a payment. A simple notification prevents the situation from escalating, giving you the opportunity to pay the missed payment. You are a co-applicant but not a co-owner. You may not repossess and sell the vehicle to pay off the balance of the note. You do, however, have the right to sue the primary borrower in civil court to recoup your lost monies.

Consequences of Co-Signing

Every missed payment, collection account and judgment could end up on your credit report if the situation escalates to that point. Even if the account remains in good standing and you have to do nothing, it still affects your credit score: The credit line will show up on your credit report, making it seem like you have more financial liabilities than you do — which actually could put you at risk for credit denials due to having too much existing credit.

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