Has this happened to you? Your boyfriend or girlfriend wants a new car but their credit isn’t up to snuff and they want you to be a co-signer on the loan. Maybe it’s your son or daughter who comes seeking your signature on the loan document.
As credit gets tighter because of the fallout from the subprime mortgage market, you can expect more people with less-than-perfect credit to need co-signers in order to get car loans.
As much as your heart may be in the right place because you want to help, it’s a proposition fraught with financial dangers for you.
The vast majority of questions I get from readers involve hapless co-signers who are now stuck with making payments on a car they often don’t even have in their possession.
What people seem to overlook when they co-sign a car loan is that unless their name is on the title, along with the other buyer, they may not have any legal claim on the vehicle yet can be fully on the hook for the payments.
The usual scenario involves girlfriend-boyfriend transactions. The relationship goes sour and either as retaliation or just a plain lack of concern, one or the other departs with the car and stops making payments.
The first piece of advice to anyone considering co-signing a loan is to not do it unless you have some legal tie to the person, like a marriage license. But sometimes affairs of the heart override common sense, so there are a few things you can do to protect yourself.
First, make sure your name is on the title and that it’s stated with the word “and” when it comes to listing the owners. Legally that means the car can’t be sold without both parties’ signatures and it means that both parties have a vested interest in the vehicle.
Always make sure you have a set of keys to the vehicle, even if you never plan on driving it. If you ever find yourself having to take possession, having the keys will make things a lot less messy.
If you suddenly find yourself on the hook for a car loan because the co-signer has stopped making payments, immediately contact the lender and see what can be worked out.
You should know that the lender is not going to say, “That’s too bad, we’ll let it slide.” They made the loan because you said you would make the payments if the other person doesn’t. If you don’t make the payments, the delinquency will show up on your credit report, as will repossession.
But the lender is probably not anxious to take back the vehicle, since lenders don’t want to be in the used car business. You may be able to work out a renegotiation on the loan to lower the payments by extending the term or you may get a grace period of a month or so to get your financial house in order.
One more thing: Make sure that throughout the process there is insurance on the vehicle. Someone who has let the payments lapse probably hasn’t kept the insurance in force either. If the car is damaged or stolen, you could have payments on a car that’s undriveable or destroyed.
How prevalent are these scenarios?
According to the latest statistics available, about 11 percent of all car subprime loans — the ones most likely to have a co-signer involved — were delinquent in 2006.
What that means is that there’s a significant risk to co-signing that loan and you should examine what you’ll do if all of a sudden that loan payment falls back on you.