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Can a person co-sign a car loan up to a specific amount, less than the full value of the loan?

Article says that "You’re actually committing to be 100% responsible for that debt".

For example, assume I have friend with a low credit score who is buying a used car costing about 12K USD, and his car dealer is suggesting that he can get better interest rate if someone cosigns the application. I trust him, but want to limit my liability to say $2k, not the full 12k (12-2.5=9.5k). Will I be able to do that?

  • You can ask. They'll almost certainly say no, but there's no legal reason why you couldn't do this. – ChrisInEdmonton Sep 13 at 20:51
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    Do a search on this site for "cosign" and see if you still want to be a part of that deal (even with limited liability). – D Stanley Sep 13 at 21:05
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    He needs to buy a used car for $2k USD and learn to maintain cars. The fact that he refuses to do that is a big bag of 'not your problem'. – Harper Sep 14 at 1:34
  • @harper he is not refusing, the question is about the tools available and flexibilities. – Raj Sep 14 at 23:06
  • Note: This is a fictitious question, that raised from a discussion, but can happen in anyone's life. – Raj Sep 14 at 23:36
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No. No lender is going to touch such a weird deal, because it breaks all their risk models.

Further, it doesn't work like that. The usual bad outcome is blam, suddenly there's a rather bad mark on your credit report. It's completely out-of-the-blue. Some days later you'll get a nasty letter in the mail. The damage is done. It turns out your friend stopped paying at least 60 days ago; today, the damage is done. You're just now hearing about it.

You think "Well surely, I can pay some money and get that removed" - nosirree. The mark is indelible, for the most part.

"They wouldn't mark my report, would they?" Oh, yes.

You think "Well surely, they will give me 30 days notice that I need to start covering the note". Yeah, they did at the time you cosigned the loan, they told you when all the payments would be due. In writing.

You think "Yeah, but I mean, I'm not going to make every payment pre-emptively on the off-chance my buddy doesn't pay! We would double-pay 99% of the time! Surely they must be responsible somehow for signaling that my friend is late and I better cover it!" No, they're not responsible for that. You and your friend are responsible to work it out between yourselves.

You think "No problem then, my friend will warn me if he can't pay." Um....

... More likely than not, your friend is now estranged to you, precisely because he can't pay and feels terrible about it. The impact to your credit reports is the last thing on your mind, and he puts off telling you (or interacting with you at all) until things melt down.

End of friendship, of course.

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    thanks, but it is not weird deal. Basically it reflects that the financial institutions has not evolved – Raj Sep 14 at 23:08
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    Unfortunately that opinion is only meaningful if you can find lenders who agree with it. Regardless, this does nothing to solve the more urgent problem with cosigning: that which I describe here. If you want a lender to be "evolved" enough not to burn your credit if he defaults, you will have a long wait. – Harper Sep 14 at 23:14
  • @raj this deal is 'weird', meaning non-standard. Financial institutions don't like non-standard deals, because they need more individual analysis to see if they make sense. Versus, if you are able to put your facts into a neat little box that matches what their corporate lending rules are, someone locally can quickly make a decision. For a small car loan like this, no one will want to even spend an hour considering the new type of risk in your scenario. – Grade 'Eh' Bacon Oct 4 at 14:19
  • Yes@Grade'Eh'Bacon exactly... That individual analysis is costly and requires experts, and they don't make enough money on loans like this to justify bringing in experts. – Harper Oct 4 at 15:53
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My rule is very simple: If you have the money and want to give it to your friend, give him the money. If you don’t have the money, or don’t want to give it to your friend, don’t give him the money. Never co-sign. It breaks your bank, and it breaks friendships.

If you want to, you can give your friend a $2,000 loan. Or a present. Possibly with money you borrowed from your bank, which you can pay back. That way there is no risk for your credit, only for your wallet. Don’t co-sign.

Copied from a comment by Damila: “Any loan by the OP to the friend is a personal loan and frankly should be looked at by the OP as a gift.”

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NOTE: I do not know for sure if car financier would routinely allow for a "limited cosigning" as the one requested by the OP. Since my answer proposes an alternative approach, I will assume that such an agreement would be possible just to compare it with my proposed idea.

The different interest rate for you and your friend is due to your friend being considered a higher risk, thus requiring a higher rate for the loan to compensate the risks of your friend failing to pay it.

If you accept a liability for $2K, the other lender still has the same risk of your friend failing to pay the remaining $9.5K1. So, the borrower would like your friend to pay the same interest for the $9.5K and "your" interest rate for the $2K2.

A much cleaner option could be to lend the $2K to your friend. The reduction in principal can reduce the interest rate slightly, but it will reduce the interest more because the debt is smaller, allowing him to pay in full faster (even less interest paid). And, certainly, there will be no additional liability to you since that loan to your friend is completely unrelated to the loan your friend gets to buy the car.

So, there are several scenarios:

  • Your friend is unable to pay the car & your loan. You lose the $2K, but in that scenario you would have lost the $2K anyway by cosigning the car. The only downside is that you "lose" the $2K a little earlier so you cannot invest it2.

  • Your friend pays the car & your loan. The only difference is that you did not have the $2K available to invest until your friend pays you3. And if that bothers you, you could ask your friend some interest (lower than the car financier) as compensation.

  • Your friend pays the car & decides not to pay your loan. There are always additional risks when lending to family & friends and this is one we cannot assess. Maybe you can somewhat protect against it by getting your loan secured against your friend's car (but even with that protection it could get messy, or your friend could have an accident and total his car...)4

  • Your friend is unable to pay the car but he repays your loan to you (probably at a much later time). Again, we cannot assess how likely it is. If you had cosigned the loan you would have lost the $2K.

As far I can see, in the first two scenarios you are in the same position as if you had cosigned the loan with limited liability. In the third one you could be worse since the moment your friend finish paying the financier he may lose the incentive to continue paying his other debts (towards you), and the fourth one you could be better off.

1In fact it could be a little lower since it is easier to pay in full a smaller debt, but it would not be considerably lower.

2A simpler idea would be considering what you ask as your friend getting two different loans; a $2K loan cosigned by you and a $9.5K with no cosigner.

3But $2K is not a big amount so you would not get a lot of profits from it.

4Of course, if the car financier also secures his loan against the car, then probably that will be more complicated.

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    The car financier will definitely secure the loan against the car. That is how car loans work. Any loan by the OP to the friend is a personal loan and frankly should be looked at by the OP as a gift. – Damila Sep 14 at 4:19
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If you want to limit your downside exposure to $2000,

Buy the car yourself and lease it to him

Whatever the down payment is, you make him pay that to you as a "lease origination and right-of-buyout fee".

Require him to carry full insurance not only to protect the official lender, but also a rider to protect you.

Then you require him to make the monthly payments on time. If he is late, you pay on time regardless. Hence the official lender is satisfied. Obviously you start to be out-of-pocket at this point.

If he falls significantly behind, you repossess the car, sell the car, and pay off the loan. You are now out of it and gone.

At this point your total profits will be

  • + the money you earned selling the car
  • - the payments you had to make for him
  • - the payoff cost of the loan

Your profits might be a positive number. They'll likely be a negative number, i.e. They will be losses. It is rather unlikely the losses will be worse than -$2000. This satisfies your parameter that you don't want to risk more than $2000.

If he completes the full duration of the loan, the car is now yours free and clear except he paid every penny of its cost, two ways: first by upfront paying the "initial fee" and second by paying a monthly payment that would be higher than a normal lease. I would hope that you wrote a written agreement entitling him to buy the car for $1 (one dollar) at the end of this "lease". Simply keep the agreement, sell him the car for $1, and now it's his car and not your problem. You are even steven.

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    Thanks it looks a better scenario, how easy is to draw the lease , are there any tools /software to write the lease with lest expenditure? – Raj Sep 14 at 23:38
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What, I understand from the posts that this kind of arrangement does not exists. But if it exists there are lots of benefits to all the parties involved, I will try to explain.

Benefit to Car Dealer: Dealership will be able to sell a car that is worth 12, instead of a car that is suppose 8K.

Benefits to Loan Company( let us call bank): The bank will already have lien on car. If the friend cannot pay, the bank can siege the car and possible sell for $9k (assuming 25% discount), they have a loan of $9.5K, the bank can take the $500 from me ( the limited co signer. So what I am saying the bank has already reduced the risk substantially. Even if the bank is able to sell this car for 7.5K ( that is about 40% discount). So if a bank is so much risk averse then it should not be a bank).

Benefit to Buyer: He can have better car that he can very easily pay with the nice job he has.

Benefit to cosigner: I don't need to give the loan and need to pay only if the friend does not pay. No tax implications of gift tax, interest etc.

Thanks to all. All answers are good but did not touch the point that I may ask as separate question and will link here

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