Co-signing an auto loan for a friend or loved one is a significant financial decision. It means you are legally responsible for making the loan payments if the individual you’re co-signing for fails to do so.
In addition to putting your cash on the line when cosigning an auto loan, you’re also risking your credit. If the loan ends up in default or the car is ultimately repossessed, your credit will be damaged—even if you have a long history of paying all of your bills on time.
How auto repossession works
When you sign a lease or borrow money for a car, you don’t actually own the vehicle. The lender keeps the title for the car until you meet your obligations and pay off the loan. As part of the documents that you signed when you drove off with the car, you gave the lender the right to repossess your car if you stop making payments.
Lenders generally only repossess a car as a last resort, if you’ve stopped paying and they think there’s little to no chance you’ll resume payments. Most lenders would prefer receiving payments rather than going through the hassle of taking the car back.
If a lender does decide to repossess your car, it’s generally not required to give you any sort of notice. The lender may send a driver to drive the car away, or it may hire a tow truck. If your car has remote start, the lender may also disable your ability to start the car. While laws vary by state, a lender is typically allowed to come onto private property to repossess a car. However, it’s usually not allowed to break into a garage or otherwise damage your property.
Can a co-signer repossess a car?
It’s important to be aware that making efforts to cure a default on a loan yourself, aka “taking matters into your own hands,” is not considered a legitimate substitute for legal action in most states. The courts have this rule to discourage the kind of physical confrontation that’s possible when you attempt to repossess your friend’s car, so let the dealer or the bank repossess it.
How a co-signer’s credit is affected by repossession
Being a co-signer makes you legally responsible for the debt. By co-signing the loan, you promised the lender that you would make sure the payments got made even if the primary borrower didn’t make them. That means that late payments or repossession will show up on your credit report as well.
Liabilities as a co-signer
As the co-signer for the car, you are on the hook for this debt until it is paid in full. Your credit score, your available cash and the relationship you have with your delinquent co-signer are at risk. If things go poorly, all three of those things could suffer. These are a few reasons that you should be extremely cautious when agreeing to be a co-signer. about who and what you co-sign for.
It’s a good idea to only co-sign for individuals who are close friends or relatives that you trust. Ideally, these are individuals with a steady income who are financially stable.
To help protect yourself in such situations, you might even consider establishing a separate contract between yourself and the primary borrower. This contract would outline your expectations and each person’s obligations. Once this document is signed by both parties, have it notarized.
Rights as a co-signer
As a co-signer, you are legally responsible for the debt, but you don’t have very many rights. You have no legal right to the ownership of the car or other property. If the primary borrower falls behind on their car payments, you may think that you have the right to repossess the car yourself, but you do not.
One option you might have to protect yourself when co-signing a loan is to stay one payment ahead. You can call the lender, find out what amount is delinquent (if any) and pay it, and then make one additional payment. Then, even if your co-signer pays late again, any late payments will still count toward the balance without hurting your credit. You just need to keep in touch with the lender and always stay one month ahead.
Another option is to request to be removed from the loan. The primary borrower has to agree to the cosigner release, and the lender will only give approval if the primary borrower shows that they can pay the loan by themselves.
Building credit after repossession
Having a repossession on your credit report will cause your credit score to drop and have a negative impact on your ability to get auto loans or other types of loans. Repossessions stay on your credit report for seven years, so you want to do everything you can to make sure that the car you co-signed for doesn’t get repossessed.
Depending on your relationship with the primary borrower, you may be able to work out a deal. You could try to demand that they turn over ownership of the car while you make the remaining payments. Once the car is paid in full, you could sell it and recover some of your money.
You might try to sue the primary borrower to recover some damages, but if they failed to pay the lender, then it is unlikely they would pay you. Even if you get a judgment against them, you’d have to know how to enforce it. It’s much better to not let it get to that point.
The bottom line
Co-signing for a loan is an incredibly risky thing to do, and it puts your credit on the line. Before you co-sign for an auto loan or any other kind of loan, consider what you will do if the primary borrower defaults. Rather than co-signing, you might consider working with them to figure out how much car they can afford and looking for options that don’t require a co-signer.
If you’ve co-signed for a loan and the primary borrower is behind on payments, you have a few options. It’s most important to understand that you do not have the right to repossess the car yourself. Instead, you’ll need to either work something out with the primary borrower or continue making the payments to the lender.