Should I agree to co-sign someone else’s car loan?
If you co-sign a loan, you’re legally obligated to repay the loan if the primary borrower is unable to.
A co-signer is someone – such as a parent, family member or a friend – who adds their information, including income and credit record, to someone else’s loan application to help the primary borrower qualify for a loan or get better loan terms.
The co-signer, however, is taking on shared financial responsibility for the loan and pledging to pay it back if the primary borrower does not. If you’re considering co-signing a loan, it’s important to first understand the risks and how you can help protect yourself.
The potential risks of co-signing an auto loan
While you don’t necessarily have the same rights to the vehicle as the primary borrower, you – as the co-signer – are equally responsible for ensuring the loan is paid back.
If the primary borrower doesn’t make their monthly loan payment, you will be asked to make the payment. Any missed payments could also appear on your credit reports and impact your credit scores, making it harder for you to get credit in the future.
Defaulting on a loan could also lead to the lender repossessing and selling the vehicle, and depending on state law, the lender could sue you and the primary borrower for the outstanding loan balance.
How to protect yourself as a co-signer
Before agreeing to become a co-signer, check your budget and make sure you’re able to make the monthly auto loan payments if you need to.
You can also request that the lender send you monthly loan statements or provide you access to the online loan account, which can alert you to missed payments and to the overall loan’s status.
Information the lender should provide before you sign
As co-signer, you should receive an advisory notice from the lender before signing the loan agreement, and it generally contains some of the following information:
- You are being asked to guarantee this debt. Think carefully before you do. If the borrower doesn’t pay the debt, you will have to. Be sure you can afford to pay if you have to and that you want to accept this responsibility.
- You may have to pay up to the full amount of the debt if the borrower does not pay. You may also have to pay late fees or collection costs, which increase this amount.
- The creditor can collect this debt from you without first trying to collect from the borrower. The creditor can use the same collection methods against you that can be used against the borrower, such as suing you, garnishing your wages, etc. If this debt is ever in default, that fact may become a part of your credit record.
What lenders can’t do
A lender can’t force you to put your information on someone else’s loan. They also can’t force certain people, such as a spouse, to be a co-signer unless they are applying jointly for the loan.
Before signing the loan contract, make sure you fully understand and feel comfortable with the loan terms and details. 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.
Know before you shop
There are several important financial decisions to make before you agree to repay a loan. Learn what questions to ask so you can make the best choice for you.