This topic is near and dear to my heart. I have been a cosigner on a loan before and although it was not for a car loan, the basics are the same. Let me also state clearly that it did not work out well for me. Although this article is about cosigning for a car loan, please understand that when you cosign for anything, the situation is the same. The difference lies in what the asset is and the amount of the guarantee. You can obviously also cosign for home loans and credit cards as well, so understand what I’m saying here and apply it to those types of guarantees too if someone asks you to cosign. In addition, you should always do a background check and get references if someone asks you to cosign for them. Just because they’re family is no excuse to surrender good judgment either. Have discernment!
First of all, when someone needs a cosigner it can mean two things. One, they’re young and have not established credit and do not have stable income yet and are just starting out. This would apply to young graduates, etc. The second type is the one you need to be very careful of. They are the type with very bad credit, no job, a history of stiffing creditors or some combination of these. You need to understand that when you cosign for a car loan, you become another guarantor the car dealership or bank can look to for FULL payment in the event of a default by the originator of the loan. That means if your friend, family member, boyfriend, (fill in the blank) stops paying the bills, the dealership and / or bank will call the originator first and if they continue to not pay, they’ll start calling you.
By the way, their favorite time to call is 8:30 am on Saturday morning! Imagine your surprise when you did not even know the person you cosigned for was not paying the bill. They will do this every week at the same time. It’s a psychological warfare strategy. You are also responsible if the asset is damaged from neglect or an accident. So that means if the dealership reposses the car due to neglect and there is a significant value loss between the value of the car in it’s present condition and the loan balance, you as the cosigner will be responsible for that too. If the car is totaled in an accident and the owner does not have insurance or insurance covers less than the balance of the loan, you are also liable to pay the difference in the event the owner does not. In these cases, the cosigner typically has to take a hit. That’s why the bank and / or dealership wants a cosigner in the first place. They’re worried about the initial borrowers ability to pay and they’re good at getting money. Depending on how aggressive the lender is, they can garnish wages and / or place liens on your house to recover payment. In some cases you may not share title in the car so make sure you negotiate that up front. It’ll give you more leverage in case things go bad.
I’m not suggesting that cosigning is bad every time but many times it is very risky. Take it from me as someone who has done it and got burned. However, I knew what I was doing and the risks though and that is all I’m giving you here, an education on the topic so you can make an informed decision as well.