Co-signing an auto loan means cosigning the loan contract with the borrower because he/she may be under aged to secure a loan by himself. Law requires some major also be part of the contract. Yes, it is a good attitude to help a needy person secure an auto loan. But co-signing an auto loan can lead to a tricky situation if the borrower fails to pay the terms correctly.
If such things happen, then under the federal law mandated cosigner’s notice, the cosigner is the guarantee of the debt and he/she will be liable to pay the missing terms. You, as a cosigner, may have to pay the whole amount if the borrower fails to pay and that involves additional payments such as late fees or collection costs, which actually increases the original amount. In certain states – and not in certain other states – the state law allows the creditor to collect the debt from the cosigner even without approaching the borrower once. They can resort to the same collection methodology against the cosigner that can be used against the borrower, which include suing or garnishing the wages of the person concerned. Such an occurrence can even tarnish the credit record of the cosigner.
Looking back at the history of the plight of cosigners in the instances where borrowers defaulted, it was found that in three out of four times the cosigner had to carry the burden of unfinished payments. By cosigning one may be showing a helping mentality, but that also has a hidden risk factor that a professional lender doesn’t want to take.
Given the tangles and complexity involved in the cosigning an auto loan, it is advisable to consider these factors before putting pen to paper, event it is for your child or friend in need.
- Make sure that you have enough money back up to pay the loan by yourself should a worse situation arises. If you can’t and you have already signed the contract, the creditors can sue you or the entire ordeal could end up damaging your credit ratings. If you have pledged property to secure the loan, then you may end up losing that as well.
- If in a fix, then you may be unable to apply for other credits for the creditors will look upon your cosigned liability as one of your obligations.
- Before cosigning the auto loan, you can ask the lender how much you might owe in an extreme situation. Also, if possible, negotiate specific terms of your obligation like limiting the liability to just the principal, to exclude late charges, court costs, and attorneys’ fees.
- You – as a cosigner – have the right to ask the lender to give it in writing, to notify you in case of a default from the borrower. Such a move will provide you enough time for damage control.
- Keep all the relevant documents and papers relating to the loan. It may prove useful at a later stage.
Also check the state laws to see the full scope of cosigner rights. Ignorance can be a big hurdle in case any legal tangles arise.