When a family member or friend needs help securing a loan to buy a car, either because they have poor credit or insufficient income, you may be asked to co-sign the loan. Agreeing to add your name to someone else’s car loan as a co-signer means you’re responsible for making payments should the primary borrower fall behind and fail to keep the loan current.
But with the exception of a few specific cases, agreeing to co-sign an auto loan will not affect your own auto insurance policy or the insurance rates you pay. Still there are insurance ramifications to keep in mind before becoming a co-signer.
Co-signing an auto loan likely won’t affect your insurance
Helping someone purchase a car by co-signing their loan is not a commitment to be taken lightly. Most important of the potential consequences is that should the individual fail to make payments on the loan, you will be responsible for the debt. By co-signing you are taking on a substantial financial obligation. And if the loan goes into default, it will impact your credit as well as the primary borrower’s credit.
However, it is unlikely that simply co-signing a loan would impact your auto insurance policy, or the rates you pay for vehicle coverage. If you don’t plan to drive the vehicle that you are co-signing for, there should be no ramifications for your car insurance.
“Co-signing a car loan should not impact your own insurance premium, unless, of course, you decide to add the co-signed vehicle to your own insurance, in which case your premium will go up to reflect the additional vehicle,” says Douglas Heller, director of insurance for the Consumer Federation of America and a nationally recognized insurance expert.
Exceptions to the rule
There are a few specific exceptions to this rule — occasions in which being a co-signer on an auto loan might affect insurance for your own car insurance policy. Most notably, if you live under the same roof as the primary borrower on the loan and are already on the same insurance as the individual buying the car, your insurance will be impacted. In such cases, the policy premium will go up to reflect the additional vehicle.
There may also be other instances when there are insurance ramifications associated with being a co-signer. Heller states that living under the same roof as the vehicle owner or regularly driving the car could result in you needing to be added onto the insurance policy.
Co-signers are not usually liable for accidents
There are many factors to consider when co-signing an auto loan for another individual, among them: Who is liable should the vehicle be involved in a collision or an accident of any type? As a co-signer and not a co-owner, you are generally not on the hook in such cases.
“Co-signing for a car loan doesn’t make you liable for the primary borrower’s bad driving, DUI or even driving without auto insurance,” says Steve Sexton, a financial advisor and CEO of Sexton Advisory Group.
However, the limits of responsibility change if your name is on the vehicle’s title as co-owner, which would be the case if you were a full co-applicant on the loan — not merely a co-signer.
In this scenario, you may be liable for damages in an accident if the driver of the vehicle you co-own is found to be the party responsible or the one who caused the accident. Furthermore, if the accident results in a lawsuit you could also be potentially liable.
Being a co-signer vs. being a co-owner
Being a co-signer on an auto loan is not the same thing as being a co-owner. You are only a co-owner of a car if you are full co-borrower on the car loan and your name is listed on the vehicle’s title along with that of the other borrower. Co-owners have an equal stake in the asset, which is the vehicle itself, and are equally responsible for keeping the loan payments current if a loan is used to purchase the car.
As a co-signer, however, you will not have any legal ownership rights or stake in the vehicle. And your name will not be listed on the vehicle’s title. You are simply obligated to pay the loan should the primary borrower default. A co-signer essentially acts as a guarantor for the primary borrower, meaning you agree to step in and assume responsibility for the unpaid debt should the need arise.
The bottom line
Co-signing a car loan for a friend or loved one can be a significant help for the primary buyer — not only helping them to purchase a vehicle but also helping them build credit when needed. But before taking such a step, think carefully about whether you are willing to take on such a financial obligation. You might even call your insurance company to nail down with certainty whether your insurance policy will be affected.