Cosigned for a Car Loan and It Went Bad

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Contributing Writer

Bethany Hickey is a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. She is a content writer for Auto Credit Express, CarsDirect, and many other automotive blogs, as well as the Poetry Editor for UM-Flint’s writing magazine.

, Contributing Writer - January 14, 2021

If you cosign on an auto loan for a friend or family member, and things go south, it can become a difficult situation for everyone involved. If the primary borrower stops paying on the loan, it impacts your credit and the loan could fall to you to pay. When the auto loan you cosign for goes bad, we have four solutions that could resolve your issues.

Cosigner on an Auto Loan

When you cosign on a car loan, you lend the primary borrower your good credit score so they can qualify for vehicle financing. You also assume some responsibility, in that the lender can ask you to make the payments or come after you for the loan balance if things go bad.

If you’ve cosigned on someone’s auto loan, the activity on the loan impacts your credit reports. This means on-time payments can improve both of your credit scores, but the missed or late payments can tank it. Defaults and repossessions – even if the primary borrower is at fault – also appear on your credit reports. As the person with the higher credit score, you have more to lose and you could see a big drop in points.

There are situations where the primary borrower can’t handle the auto loan, or a circumstance where they can no longer afford it. If this happens, the lender can ask you to pay for the loan. If you don’t pay, the balance could be sent to collections and lower your credit score even more. However, there are ways to remove your name from the car loan.

Resolving Cosigner Issues

When you cosign on an auto loan, there are a few different approaches you can take when dealing with the primary borrower. Since you likely know the person you cosigned for, this is where things can get a bit tricky. But remember, you don’t have any ownership rights to the vehicle – so you can’t force the borrower to do anything.

If you both can come to an agreement that works for everyone, you both may be able to walk away with as little damage to your credit as possible. Here are four ways a cosigner and primary borrower may be able to resolve issues with an auto loan that goes bad:

  1. Have the primary borrower sell the car. If the primary borrower is able to sell the vehicle and pay off the loan with the proceeds, you and the borrower can walk away from the car loan. The primary borrower also doesn't need you to present for the sale or sign the title to sell the car, since cosigner’s don’t get their name listed on the title of the car.
  2. Help the primary borrower make the car payments. If the loan isn't in default, and the borrower is struggling to make ends meet, you could step up and help them with the monthly payments. If your biggest concern is your credit score and you’re able to help them, then it may be the path of least resistance. However, be clear with the primary borrower on how much you can help and have open communication. As a cosigner, you have a responsibility to assist the borrower in making the payment if they’re unable to. But that doesn't mean you're expected to make regular payments, that's the borrower's responsibility.
  3. Ask the primary borrower to refinance. Refinancing is one of the most common ways to remove a cosigner. The primary borrower could apply for refinancing, and if they qualify, replace the auto loan with another one – without you on it as a cosigner. Aside from removing you from the loan, if the primary borrower qualifies they could even lower their interest rate. To refinance, the loan needs to be current, have equity, and the primary borrower’s credit score typically needs to have improved. Refinancing has some other requirements as well, which you can find here.
  4. Talk to the borrower about surrendering the vehicle. A voluntary surrender is reported as a repossession. If the primary borrower can’t afford the auto loan anymore, and you don't have the means to help them with payments, surrendering it could be more convenient than waiting around for a repo man. Voluntarily surrendering the vehicle allows the borrower to avoid paying recovery fees, and they can drop it off when it’s convenient for them. The lender can then prep that vehicle for sale or auction, and the proceeds are put toward the loan balance. If the sale doesn't cover the full balance, called a deficiency balance, you and the primary borrower are responsible for paying it.

Stay in Contact With Everyone!

If none of these solutions fit your circumstances, then it may be worth it to directly confront the primary borrower and talk to the lender about your options together. Some lenders may be willing to make deferment arrangements, where the payments are paused for a few months and added to the back-end of the loan. This gives the borrower time to sort things out. The worst a lender can say is no, so staying in contact with the borrower and the lender gives you a better chance of a positive outcome as a cosigner.

Looking for Lending Resources?

If you’d like to stop being a cosigner, the key is talking to the primary borrower about your options. One of the simplest ways to remove yourself from the loan is having the primary borrower refinance, so you can get off the loan and they can keep the vehicle.

However, if they don’t qualify for refinancing and can’t afford the car they have, then it could be time for them to trade it in for something more affordable. Bad credit can get in the way for many borrowers when it comes to vehicle financing, but here at CarsDirect, it's not an issue for our special finance dealership network.

If you or the primary borrower need bad credit lending resources, then start with us! We’ve created a network of dealers that are signed up with bad credit lenders, and we want to look for one in your local area for free. Fill out our free auto loan request form to get the process started, and we’ll get right to work!

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, Contributing Writer

Bethany Hickey is a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. She is a content writer for Auto Credit Express, CarsDirect, and many other automotive blogs, as well as the Poetry Editor for UM-Flint’s writing magazine.

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