What You Should Know About Co-Signing A Car Loan

Brai is the founder of SW4 Insights, a public policy advisory firm based in Washington D.C. He has over a decade of experience as a journalist and consultant covering finance and economic policy, with a particular focus on distilling complex topics t.

Brai is the founder of SW4 Insights, a public policy advisory firm based in Washington D.C. He has over a decade of experience as a journalist and consultant covering finance and economic policy, with a particular focus on distilling complex topics t.

Brai is the founder of SW4 Insights, a public policy advisory firm based in Washington D.C. He has over a decade of experience as a journalist and consultant covering finance and economic policy, with a particular focus on distilling complex topics t.

Brai is the founder of SW4 Insights, a public policy advisory firm based in Washington D.C. He has over a decade of experience as a journalist and consultant covering finance and economic policy, with a particular focus on distilling complex topics t.

Chris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a n.

Chris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a n.

Chris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a n.

Chris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a n.

| Loans & Mortgages Editor

Updated: Aug 8, 2022, 5:00am

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If someone you know—like a close friend or a relative—wants to apply for a car loan but is worried about being rejected, they might seek help. Perhaps they have bad credit or a high debt-to-income (DTI) ratio. Either way, they might ask you to be a co-signer on their loan to help them qualify.

Here’s what you should understand before agreeing to co-sign an auto loan.

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Things to Consider Before Co-signing a Car Loan

If you’re going to become a co-signer, make sure you have a good credit score, strong history of making your payments on time and/or a low DTI ratio. This will make the lender less concerned about approving the loan and even help the borrower secure a lower interest rate.

However, there are many other factors to consider when deciding whether it’s a good idea to co-sign a loan or not. Here’s what you should know:

What Your Obligations Are

By becoming a co-signer, you’re agreeing to guarantee the other person’s debt. If the borrower doesn’t make payments on the car loan or defaults, you’ll be on the hook for repaying the loan. However, keep in mind that while you’re signing on to be responsible for someone else’s car loan, you don’t get a title or ownership of the car in any way.

You Could Become Responsible for Repaying the Loan

As a co-signer, you’re fully responsible for paying back the loan to the lender, not merely vouching for the primary borrower. You’re responsible for making the monthly payments if they stop paying. So be certain that you have the ability to make those monthly payments now and in the future.

If the primary borrower defaults on the auto loan, the lender could then sue both of you to claim the outstanding loan balance, depending on the law in your state, which could hurt your finances.

Co-signing Will Impact Your Credit

Before agreeing to co-sign, consider how it will impact your ability to access credit. Once you co-sign a car loan it will be listed on your credit report as part of the total amount of debt you have. This will increase your DTI which could impact your ability to get a credit card, mortgage or other loan.

Any missed payments on the car loan that you co-sign can also make it difficult to get another loan in the future as on-time payment history is a major factor of your credit profile.

How to Co-sign a Car Loan

Co-signing a loan means both you and the main borrower are responsible for the debt, so you will both have to fill out a loan application.

Just like with any car loan application, the lender will require proof of your employment history—both current and previous employers—as well as proof of your income. So, be ready to provide recent pay stubs as well as documentation regarding any other assets and income sources. If you’re self-employed, you’ll need to bring two or three years of tax returns.

The lender will also pull your credit report to evaluate your creditworthiness. Be mindful that your credit score will take a temporary hit when they do this. So make sure you aren’t planning on applying for another loan not too long after.

How to Remove Yourself From a Co-signed Car Loan

If you decide to co-sign a car loan, you or the other borrower may decide down the line to no longer be jointly responsible for repayment. Once you have secured the other party’s agreement to get your name off the loan, there are a few ways to achieve co-signer release:

1. Refinancing: The most common way to remove yourself as a co-signer is by refinancing the car loan. Through this process, the primary borrower takes out a new loan on their own—either with the same lender or a new one—to pay off the first car loan. This will end your legal obligation.
2. Loan modification: This option usually comes with specific requirements which vary per lender. For example, in the event of the co-signer’s death, a loan modification would be needed to remove the deceased’s name from the loan. A modification is also sometimes permitted if a couple is going through a divorce. One of the names is removed from the loan so the other can retain ownership of both the debt and the vehicle.
3. Court settlement: You can initiate a civil lawsuit regarding who is responsible for repaying the loan or who has ownership of the car. If the judge releases you from the agreement, a settlement order is issued to the lender, which initiates a loan modification. This course of action is most commonly included in divorce proceedings.

If You Decide to Co-sign a Loan—Protect Yourself

The Federal Trade Commission (FTC) has recommendations regarding what steps you can take to protect your financial well-being if you decide to co-sign a loan:

• Make sure the primary borrower has a budget. Whoever the primary borrower is, whether a friend or family member, should be ready to show you how they plan to repay the loan. This will help you both make sure the monthly loan payments will be affordable.
• Know how much you might owe if the borrower defaults. Talk to the lender to find out how much you might owe if the primary borrower defaults, and be prepared to pay that amount.
• Request regular updates on the loan from the lender. Ask the lender, and the primary borrower, to send monthly statements for the loan so you can stay updated. Also, ask them to agree in writing to notify you if a payment is missed or the loan’s terms change. This way, you won’t be caught off guard and will have time to address the problem.
• Save copies of all loan documents. Make sure you get copies of all important loan documents, including the loan contract, the Truth-in-Lending Act disclosure statement and any warranties. You might need these if there is a dispute between the lender and the borrower.
• Keep an eye on your credit report. It’s very important to check your credit report at least once a month to catch any missed payments or errors. If you see an error, you can dispute it with both the loan servicer and the credit reporting agencies.
• Check your state’s laws on co-signing. Finally, check the laws in your state to see if there are any additional co-signer rights.