ImagePixel/Getty Images: Illustration by Issiah Davis/Bankrate
- As a co-signer on an auto loan, your credit suffers when the vehicle is repossessed.
You may also be responsible for paying more on the loan even after repossession.
You have options for avoiding a repossession, including working with the lender to come up with a payment plan or be removed from the loan.
If you’re a co-signer on an auto loan, car repossession is a legitimate fear. If the primary borrower misses loan payments and the car gets repossessed, it can have real consequences for the co-signer.
“Repossession is bad for both the borrower and the co-signer because both credit scores will take a hit. Late payments, loan defaults, loans sent to collections and court judgments can all be noted on the primary borrower reports and the co-signer’s reports,” says Howard Dvorkin, CPA and personal finance expert at Debt.com.
How a co-signer is affected by repossession
When you co-sign on a loan, you take full responsibility for the loan. As a co-signer on an auto loan, you likely don’t use the vehicle regularly. However, repossession’s impact on your credit is the same as it will be for the primary driver of the vehicle.
Lenders generally only repossess a car as a last resort, if you’ve stopped paying and they think there’s little to no chance you’ll resume payments. Most lenders would prefer receiving payments rather than going through the hassle of taking the car back.
However, lenders aren’t obligated to notify a co-signer if the primary borrower stops making payments. In many states, they often aren’t required to send a notification if they decide to repossess the vehicle. So, if a co-signer isn’t protecting themself by tracking payments, repossession could come as a surprise.
The lender may send a driver to drive the car away, or it may hire a tow truck. If your car has a remote start, the lender may also disable your ability to start the car. While laws vary by state, a lender is typically allowed to come onto private property to repossess a car. However, it’s usually not allowed to break into a garage or otherwise damage your property.
As the co-signer on the auto loan, you will suffer the same impact on your credit as the primary borrower. You are on the hook for this debt until it is paid in full. Your credit score, your available cash and the relationship you have with your delinquent co-signer are at risk. If things go poorly, all three could suffer.
Can a co-signer repossess a car?
It’s important to be aware that taking possession of the car if the primary borrower defaults, or “taking matters into your own hands,” is not a legitimate substitute for legal action. The courts have this rule to discourage the kind of physical confrontation that’s possible when you attempt to repossess your friend’s car, so let the dealer or the bank repossess it.
Your credit will take a major hit
When you co-sign on an auto loan, you take on all the credit impacts of the loan. This can be good if the primary borrower manages the loan well. But if they don’t, your credit will be negatively impacted. A repossession can decrease your credit score by a hundred points or more.
“A repossession goes on your credit report — and it stays there for seven years. That will drag down your credit score long after the car is gone,” says Dvorkin.
If you do face a negative impact on your credit score, all is not lost. You can work to repair your credit. Establishing a budget, maintaining positive financial habits and talking to a credit counselor, when necessary, can all help you increase your credit score.
You may still owe money on the repossessed car
As a co-signer, you are legally responsible for the loan. This means you are responsible for paying back any money owed on the loan.
Once a car is repossessed, the lender can sell or auction the vehicle to receive back loan funds. However, in some cases, you may owe more on the car than it’s worth. This means even after repossession, you can still owe money on the loan.
As the co-signer, you should make sure your responsibilities are taken care of. Do your due diligence after repossession to find out how much is owed on the loan, and work with the lender and the primary borrower to figure out how to pay off the loan.
How to protect yourself from repossession as a co-signer
If you think the vehicle may be at risk of repossession, you can work to protect yourself before it happens. You may be able to avoid certain repercussions or avoid repossession altogether if you plan ahead. Here are a few things to try:
- Stay in contact with the lender and make payments when necessary. If you can afford this, keeping current on payments is the simplest way to prevent repossession.
- Ask for a deferral. If you can’t afford to make payments, document the financial distress in a formal hardship letter and ask if skipping a payment or payments is possible. Skipped payments will be added to the end of the loan term.
- Pay off the loan in full. If you can afford to pay off the loan, it’s an option. Then, you won’t have to worry about what the primary borrower may or may not pay on the loan.
- Settle the car loan. You and the primary borrower may negotiate with the lender to settle the debt by paying a lump sum that’s less than the amount owed. You’ll need to pay taxes on the forgiven debt and will still see a negative impact on your credit score, but it can help you avoid multiple derogatory marks from many missed payments.
- Negotiate a payment plan. Dvorkin says that if you negotiate a payment plan with the lender and successfully make payments, the lender “might hand you ownership of the vehicle.” He adds, “Once you’ve paid it off, you can try to sell the car and get back some of the money you’ve lost. At least this way, you preserve your credit score.”
The bottom line
Co-signing for a loan is risky, and it puts your credit on the line. Before you co-sign for an auto loan or any other kind of loan, consider what you will do if the primary borrower defaults. Rather than co-signing, you might consider working with them to figure out how much car they can afford and looking for options that don’t require a co-signer.
You have a few options if you’ve co-signed for a loan and the primary borrower is behind on payments. It’s most important to understand that you do not have the right to repossess the car yourself. Instead, you’ll need to either work something out with the primary borrower or continue making the payments to the lender.