You Could Be Sued By The Lender
In some states, if the lender does not receive payments, it can try collecting money from the co-signer before going after the primary borrower, according to the Federal Trade Commission.
To get to that stage, the borrower would likely have missed several payments, and the debt would already have started to affect your credit. Lenders are likely to consider legal action when the debt is between 90 and 180 days past due.
If the worst happens and you are sued for nonpayment, youre responsible as the co-signer for all costs, including attorneys fees.
Is It Possible To Remove A Cosigner From A Car Loan
The simple answer to this question is yes, you absolutely can. However
There are only a few ways you can remove a cosigner from your car loan, in part because the idea of getting a co-signer is to make it difficult for both parties to back out.
Keep in mind people often bring in co-signers because they don’t have enough credit or capital to either qualify for a loan themselves or if they aren’t sure they’ll be able to fulfill their monthly payment obligations. Regardless, banks and lending institutions like cosigners because it gives them more confidence that the loans they hand out will be paid off one way or another.
The bottom line is while its possible to remove a cosigner from your car loan, it can be a difficult and sometimes complicated process. We strongly advise investigating alternative options before attempting to remove a co-signer.
Should You Get A Cosigner On A Car Loan
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If you have a limited credit history or low credit score, you might have a tough time qualifying for a car loan. Or, if you do qualify, the loan may come with a steep interest rate that drives up your monthly payment amount and the total cost of the loan. However, you may be able to get your loanand a better interest rateby applying with a cosigner.
A cosigner agrees to share responsibility for paying back the loan, using their good credit history to reduce the loan’s risk in the eyes of the lender. Adding a cosigner can be a great way to qualify for a loan that wouldn’t be available to you otherwise, but it’s not something to be done lightly. Before you ask someone to cosign a loan, make sure you both understand what the agreement means, and what the potential consequences could be.
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Offer Collateral Instead Of Cosigning
This option still puts you at risk, but at least it limits that risk to one specific asset.
If your friend or family member wants a car loan, offer to put up your car as additional collateral. If theyre applying for a mortgage, offer a lien against your home as extra collateral. This will reduce the risk to a lender enough that they may be willing to give a loan to your loved one without requiring a cosigner.
Granted, if your friend or family member defaults on their loan with your property as collateral, youd lose your car or home. So you still have to monitor their loan payments and potentially nag them or step in to make payments on their behalf, but at least you dont risk your credit or any other assets.
Removing Yourself As A Co
If issues arise, removing yourself as the co-signer is not always a straightforward process.
Refinancing the loan is one way to have yourself removed, provided that the primary borrower can now qualify for a new loan on their own. Student loans or credit cards typically require a certain number of on-time payments before the lender will reassess the primary borrower to see if they can make payments on their own.
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Simple Tips To Secure Your Credit Score Rating If You Co
Just before co-sign, query the lender exacltly what the liberties and obligations tend to be and just how youll feel notified if installment issues occur.
In addition to that, inquire the primary borrower for the means to access the borrowed funds accounts to help you track repayments, claims Byrke Sestok, a professional economic coordinator at unique York-based Rightirement riches associates.
Its maybe not a depend on issue difficulties occur, Sestok says. If you see call at the initial month that a person is having an issue , you could do something about this.
To plan for these occurrences, create an arrangement between co-signer and debtor in advance plus in composing that spells out expectations for each person, McClary says. Your own exclusive agreement helps erase mismatched expectations, he says.
You Help An Applicant Obtain Financing
When enrolling in higher education or buying a starter home or car, its common for people to take out a loan. Take away the availability of loans, and their options shrink dramatically.
The same goes for applying to rent a first apartment. Many landlords are wary of applicants with no established credit history.
Taking a chance and cosigning for a close friend or family member can give them the opportunity to obtain reliable transportation, attend school, or move into a safer community. As someone with good credit and income, youre in a unique position to help your loved ones get off the ground.
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Getting Free Of The Loan
Once you’ve co-signed, it’s extremely difficult to get your name removed from a loan, according to the TransUnion credit bureau. Even divorce doesn’t end your obligation if you co-signed for your spouse.
To end your obligation, the borrower must pay off the loan or sign an agreement with the lender to release you. Before a lender agrees to remove a co-signer, it typically requires a specific period of on-time payments, such as one to two years.
It Helps An Applicant Build Credit
It takes credit to build credit. This raises a fundamental question: How do you get your first credit accounts with no established credit history?
The reality is that people without a credit history have a hard time qualifying for new accounts. As a cosigner on a loan, you have a hand in helping another person establish or build a better credit score and credit history.
After the first account or two, your friend or family member should have sufficient history to start qualifying for credit on their own if they pay their bills on time, that is.
Pro tip: If youre looking for other ways to build your credit, consider signing up for Experian Boost. Once you sign up for a free account, you can get an instant boost in your credit score.
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Advantages Of Using A Cosigner For A Car Loan
When a potential car buyer lacks credit history, whether they are a student, a first-time driver, or a consumer with a less than a stellar track record in the financial arena, arranging for a cosigner on an auto loan makes all the sense in the world. There are many reasons to go with a cosigner for an auto loan, and potential borrowers frequently seek out family members or friends to act in this coveted role. That’s not to say that all cosigners are eager to sign onto a debt process, but many times, older family members or individuals with a solid job history and good credit will go out on a limb for those who they trust.
All of these contribute to the vast amount of younger drivers who seek a cosigner on their first auto loan, rather than choosing to go it alone and risk dealing with high interest rates that can cause a debt to snowball over time.
How Does A Cosigner On An Auto Loan Work
A cosigner is somebody who signs a loan along with a primary borrower. This arrangement is usually the result of a lender asking for one when the primary borrower can’t get approved for a loan on their own. There are many reasons for this, including when the primary borrower has bad credit, no credit history, or doesn’t meet the lender’s income requirements.
Most commonly, a cosigner is a family member, spouse, or close friend that wants to help the borrower get approved. If a cosigner is needed to boost credit, they need to have good or great credit and, if theyre not married, both the cosigner and primary borrower have to individually qualify for the loan. If a cosigner is needed to enhance income, they need to be the spouse of the borrower, which is the only way incomes can be combined to meet a lender’s requirement.
To get the deal done, all a cosigner needs to do is sign their name on the dotted line along with the primary borrower. But make no mistake, the role of the cosigner goes far beyond that of a simple character reference.
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How Does Co Signing Work With Credit
Being a co-signer itself does not affect your credit score. You will owe more debt: Your debt could also increase since the consignees debt will appear on your credit report. The amount of debt that you currently owe will increase and will be added to the amounts owed portion of your credit score.
Is A Cosigner Always An Option
Not all lenders will give you the option of having a cosigner, but many offer it as a way to make financing viable for more borrowers. You can be denied a loan for a number of reasons, including your credit score and history, as well as your income and other factors.
If you’re fresh out of college and just started your first job, your salary may be relatively low, especially when lenders factor in any other debts you might be carrying. A cosigner can help you meet approval requirements and not only buy a car, but build your own credit history as well.
If you think you’ll need someone to cosign a loan with you, it’s wise to call around to a few dealerships, banks and auto lenders to find out if they allow cosigners. That way, you can focus your search and loan application processes on lenders you know will work with you and your cosigner.
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Things Could Get Messy In The Event Of A Divorce
The major hitch of cosigning a loan is that a cosigner is potentially taking full responsibility for the debt, but actually has no legal claim to the assets. That means that if you and your spouse part ways in the future, it has no effect on your cosigned loan agreement, and creditors could still come calling. In fact, if you’ve been the one with superior credit, they may contact you first if your former spouse defaults. Why? Because the creditor is betting that you’ll be the one to pay up first. There are few options for getting out of a loan that you’ve cosigned, and settling the debt is frequently the simplest one by far.
Couples should also know that the co-signer on any loan or credit agreement is not legally required to be your spouse.
If you’d like more money management tips for newlyweds, or helpful info about combining your finances or filing your taxes as a couple, you can find helpful information in the Protective Learning Center.
Getting Your Name Off A Cosigned Loan
Thomas J. Brock is a CFA and CPA with more than 20 years of experience in various areas including investing, insurance portfolio management, finance and accounting, personal investment and financial planning advice, and development of educational materials about life insurance and annuities.
When you cosign any form of loan or line of credit, you become liable for the amount of money borrowed. This may impact your ability to borrow money for yourself because a lender will include the amount of the loan you cosigned on as part of your debt load when calculating your debt-to-income ratio.
Plus, the payment history on the cosigned loan or line of credit is reported on both the borrower’s and the cosigner’s . If you’ve agreed to cosign a loan for a friend or relative, but no longer want the responsibility of shared credit, how do you get your name off the loan? Fortunately, there are four key ways.
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Reduced Ability To Borrow
When you co-sign a loan, other lenders see that you are responsible for the loan. As a result, they assume that youll be the one making payments.
Co-signing reduces the amount of your monthly income that is available to make payments on new loans. Even though youre not borrowingand even if you never have to make a single payment on the loans you co-sign forits harder for you to qualify for another loan in your own name.
This can prevent you from accessing money, such as a mortgage or a car loan, when you need to.
Refinancing The Mortgage Is A Sure Way To Have Yourself Removed So Long As The Main Debtor Are Now Able To Qualify For A New Mortgage Independently
Refinancing the mortgage is a sure way to have yourself removed, so long as the main debtor are now able to qualify for a new mortgage independently.
Student loans or charge cards typically require a certain number of on-time repayments ahead of the loan provider will reevaluate the main debtor to find out if they may be able making costs independently.
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Liability After A Crash
As mentioned, cosigning an auto loan does not make you liable for what the primary borrower does with the car. You will not be held responsible for any accidents resulting from the drivers negligent acts. However, you are liable for the loan payments, which could pose a problem if the driver is sued.
Consider a situation where the primary driver is sued for damages in a drunk driving accident. If they end up paying a lot of money in suit settlements, they might lack enough money to pay off the car loan. This will leave you to make the loan payments.
Can Being A Co
The short answer is yes: Being a co-signer for someone elses loan can hurt your credit.
Co-signers should understand that the loan will show on their credit reports and they are legally responsible for payment, says Mike Boyle, vice president of loan operations at Freedom Financial Network, a debt relief company. In addition, if the co-signer wants to apply for a loan on his or her own whether a mortgage, vehicle, personal or something else that outstanding debt could have ramifications for the application.
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Cosigning A Car Loan: Pros And Cons
You should always consider the positives and negatives of cosigning before asking someone to help when you apply for an auto loan.
| Helps you buy a car when you cant qualify for financing on your own|
Gives you the opportunity to start establishing credit or rebuilding your credit as you make on-time payments on your loan
You may qualify for a lower interest rate, which could save you money on your monthly repayments
| Possible damage to your cosigners credit if you miss loan payments|
The cosigner may have to pay late fees and collection costs and may face legal action if the loan is unpaid, including being sued and having their wages garnished
Potential damage to your relationship with a loved one if you fail to repay the loan
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