Cosigner Rights on a Car Loan in Default

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Megan Foukes is a recent graduate from Indiana University who graduated with a bachelor’s in journalism. Megan works as a content writer for Auto Credit Express and contributes to several automotive and finance blogs.

, - August 23, 2018

Legally, a cosigner doesn’t have any rights to the car, even though their name is listed on the loan. The cosigner’s role is to help the primary borrower get approved by letting them “borrow” their good credit. Unless you’re married to the primary borrower and become a co-borrower, you won’t be able to take the vehicle in the event of a default. But, it’s important to understand and know your rights as a cosigner, especially when the borrower stops making their payments.

What to Do When the Borrower Doesn’t Pay

As a cosigner, you can prevent defaulting and repossession by contacting the lender and asking what options are available. You may request additional time to pay, although not all lenders are willing to do this, but if the primary borrower had a solid history of on-time payments, the lender might be willing to modify the loan by allowing you to skip one or more payments and adding them to the end of the loan.

If this isn’t an option and a default has already occurred, another option is to refinance. Refinancing requires good credit, and although many lenders may not refinance a car loan that’s already in default, a cosigner’s good credit may give the primary borrower an advantage in this situation. Unfortunately, this means stretching the loan beyond the original term. But, if it makes the monthly payment manageable, it’s worth it, as it prevents a further hit to the cosigner’s credit.

A third and last resort option is to sell the vehicle and use the money to pay off the loan. As long as there’s equity in the vehicle or its sale covers the payoff amount, there shouldn’t be any issue. If there’s negative equity in the vehicle, either the cosigner and/or the borrower must be able to make up the difference in order to pay off the loan and clear the title.

Cosigner’s Rights in a Repossession

If repossession isn’t avoidable, the next thing a cosigner needs to know is his or her rights during repossession. Because their name is listed on the loan, the lender must send the cosigner a written notice about four things:

  1. Option to redeem the car – This gives the cosigner and primary borrower the chance to purchase the vehicle by paying the remaining loan balance plus any repossession fees.
  2. Option to reinstate the car loan – Not all states or lenders allow this, but if the option is available, reinstating the car loan means the primary borrower or cosigner has the option to make a one-time payment (including all missed payments and repo fees) to make the loan current.
  3. Auction date and time – The lender is obligated to inform the cosigner and primary borrower of when and where the vehicle is being sold at auction.
  4. Loan deficiency total – If the car is sold and a loan balance remains, the cosigner and primary borrower are sent a notice that states the balance owed – including any repossession fees – which must be paid.

By law the lender is required to send both the primary borrower and cosigner written notices regarding repossession. Knowing this, a cosigner can take legal action against the lender if he or she doesn’t receive one or more of these notices.

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Megan Foukes is a recent graduate from Indiana University who graduated with a bachelor’s in journalism. Megan works as a content writer for Auto Credit Express and contributes to several automotive and finance blogs.

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