When you co-sign for a car loan, you put your own credit on the line by agreeing to guarantee the primary owner's payments. If the primary owner does not make the payments as promised, the lender will require the co-signer to pay off the balance of the car loan plus interest. While several pitfalls come with co-signing a car loan, one key disadvantage is that you have no rights of ownership concerning the car, only an obligation to pay if the primary owner doesn't.
The car would be registered in the name of the primary owner. The co-signer has no legal right to drive the car or take possession of the car for any reason. Even if the primary owner quit making payments on the car and the bank was threatening repossession, the co-signer is powerless to take the car. Although banks rely on co-signers to make car payments in a worst-case scenario, civil law does not give co-signers any right to take a car from the primary owner under any circumstances.
Co-signing for a car loan can affect your finances in other ways. The balance of the car loan will appear on the credit reports of both the primary owner and the co-signer. If the primary owner makes late payments on the loan, those late payments are reflected on the co-signer's credit report as well, causing the co-signer's credit score to suffer. Even if the primary borrower makes all payments on time, the co-signer's ability to obtain credit could still be affected. The loan balance for the car will appear on the co-signer's credit report and if the co-signer needs another loan, he may be turned down because he has already borrowed too much money. For this reason, co-signers who are approved for new credit often must pay a higher interest rate.
There are good reasons why friends and family members agree to co-sign car loans, but co-signing for a person who cannot obtain bank approval based on his own credit history can end up being a big mistake. It could make sense, though, for a parent to co-sign a car loan for a teenage child who lives under the same roof and is covered by the family insurance policy. Parents could turn the car purchase into a learning experience by supervising the car payments and car maintenance. Parents and legal guardians who co-sign for a car under those circumstances are in a better position to take a car even if the primary owner is still paying for it.
People who choose to help friends and family members purchase a car should consider co-owning rather than co-signing. Co-owners have equal legal rights to the car. While the person who is requesting the financial favor may object to the idea of sharing ownership of the car, that could be a sign he is insensitive to the vulnerable position he is willing to place the co-signer in.
- The Lemon Law Blog: Dangers of Co-Signing an Auto Loan
- Bankrate.com: 4 Safeguards When Co-signing a Loan
- Consumer Financial Protection Bureau. "What Is a Debt-to-Income ratio? Why Is the 43% Debt-to-Income Ratio Important?" Accessed Aug. 26, 2020.
- Federal Trade Commission. "Co-Signing a Loan." Accessed Aug. 24, 2020.
- Wells Fargo. "Secured Loans and Lines of Credit." Accessed Aug. 24, 2020.
- SoFi. "Using Collateral on a Personal Loan." Accessed Aug. 24, 2020.
- First Alliance Credit Union. "The Basics for Needing a Cosigner on a Loan." Accessed Aug. 25, 2020.
Tim Grant has been a journalist since 1989 and has worked for several daily newspapers, including the Charleston "Post & Courier," the "Savannah News-Press," the "Spartanburg Herald-Journal," the "St. Petersburg Times" and the "Pittsburgh Post-Gazette." He has covered a variety of subjects and beats, including crime, government, education, religion and business. He graduated from The Citadel with a Bachelor of Science in business administration.