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Ask Dr. Don

Does co-signer mean co-owner?

Dear Dr. Don,
I co-signed for my brother on a car loan. He defaulted, and now the bank wants me to pay. On the contract, I'm listed as the co-owner of the car. My question is, what is the difference between being the co-signer and co-owner of a car?
Jason Jalopy

Dear Jason,
Co-signing the loan meant that you agreed to be responsible for the car payments if your brother didn't keep up with them. Your credit report reflects the payment history on the car, so his default is your default unless you make the payments.

You may or may not be listed on the car's title as a co-owner. There are advantages and disadvantages to being listed as a co-owner.

The key advantage is protecting your financial interest in the vehicle if you have to make payments.

Disadvantages would include worries about insurance coverage, parking tickets and liability issues if the car was involved in an accident.

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The bank will have a lien on the car's title, protecting its interest in the collateral by keeping the car owner from transferring title without paying off the loan. Once the bank repossesses the car, most states allow it to sell the car at auction. The borrowers remain responsible for the difference between the loan balance and the sales price net of auction and repo costs. While it's conceivable that the car could net more than the loan balance, it's not particularly likely.

A voluntary repossession is marginally better on your credit report and would reduce the lender's costs to repossess the car. Selling the car yourselves and paying off the loan balance could give you a higher price for the car and avoiding both the repo and auction costs incurred by the bank. The hard part in this approach is coming up with the cash to pay off the loan so you can pass clear title to the new owner.

Repossession doesn't make your financial obligation go away, it just changes the amount you owe the bank. The negative information will stay on your credit report for seven years. You can rebuild your credit history with time, but co-signing obligated you just as much as it obligated your brother to make these payments.

-- Posted: June 5, 2003

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See Also
Co-signer blues
Fending off the repo man
Financial advice glossary
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