cosign a car loan, what is true $ risk

Question

I asked a question and I am asking same question from a different angle.

For example purpose, If I have friend( know for 6-7 years), who came to USA recently ( and I happen to come 2-3 years ago), this friend has a good job but has not build the credit. I had a car loan that has been paid off with no other loan and credit score 740+. He is buying an used car of about 12K USD. He has about $4k in bank and he can make a down payment of $2.5 k ( that is more than 20%), he ( and I guess car dealer) are suggesting that he can get better (lower)interest rate if some one cosign the application. I trust him and ready to fully cosign it for 100%of the value ? I suppose the lien will be with the Bank and with me.

In a unlikely case of my friend not paying the car, I suppose the bank will use the lien and will sell the car first and will ask me to pay any difference or the bank will directly ask me to pay the installment.

difference 1: the loan is for 9.5K and suppose the bank is able to sell the car for $8K then I will need to pay only 1.5K or full 9.5K .

difference 2: the loan is for 9.5K and suppose the bank is able to sell the car for $7K then I will need to pay only 2.5K or full 9.5K

Note: This is a fictitious question, that raised from a discussion, but can happen in anyone's life.

Answer 1

You asked:

In a unlikely case of my friend not paying the car, I suppose the bank will use the lien and will sell the car first and will ask me to pay any difference.

No. If your friend does not pay the loan installments, the bank will come after you for the whole loan, or at least whatever part your friend hasn't paid off. The bank does not want a car. They are interested only in money, and you are the most likely source of it. They will possess and sell the car only if you default on your obligation to pay the loan.

If you do not pay off the loan, then the bank will possess and sell the car (if they can) and still come after you for the difference and report that you have defaulted on a loan, thus destroying your credit for a substantial period.

Oh, and being cosigner does not get you any right to use or own the car once you have paid off the loan, and you can't force him to sell the car to pay it off.

Answer 2

Your question seems to be based on an incomplete understanding of the mechanics of how banks pursue loans when things go poorly. I'm saying this because of they way you described the situation here:

In a unlikely case of my friend not paying the car, I suppose the bank will use the lien and will sell the car first and will ask me to pay any difference or the bank will directly ask me to pay the installment.

Your "or" is actually what happens first. The bank won't pursue repossessing or selling the vehicle until they've exhausted all attempts at getting either of you to pay the loan off. And those attempts will cause a big hit to your credit score, regardless of what finally happens.

The normal way that the bank gets their money back is by your friend making regular payments. If your friend stops making payments, the bank will pursue both of you (individually) for repayment of the amount that is overdue. This is their first path - make the loan current by getting the overdue amount from either you. This generally happens well before the bank attempts to repossess the vehicle or charge off the loan. At this point, you and your friend will both take a hit to their credit score (for being late on a loan).

It's important to note that until the point at which the bank repossesses the vehicle, the amount the lender will try to collect is the full outstanding amount of the loan (plus any fees). They don't care if your friend has sold the vehicle or if the vehicle is worth a certain amount or not. In other words, their preferred outcome is that either of you pay them back the full amount of the loan, and they don't have to repossess the car.

If neither of you are able to bring the loan current, the lender will attempt to repossess the vehicle. Once they have possession of the vehicle, they will try to sell it as quickly as possible, which basically means it gets wholesaled at a very low price. Then, you and your friend will both be pursued for the difference (it's incredibly rare for a repossessed car to sell for enough to pay a loan back, especially because by the time repossession happens, there's usually a heap of late fees on top of the outstanding loan amount). Both of you will take a huge hit to your credit score again. If they can't get either of you to pay the difference, they will report the difference as a charged off amount against a defaulted loan. And once again, both of you take the hit to your credit score.

If your friend does stop making payments, and the lender comes after you, and you pay the loan off, you have zero leverage to recoup that money or get your friend to pay you back. Your friend owns the car, not you. Congrats, you just bought your friend a car.

An important point is that the lender has little obligation to communicate with the two of you in any sort of uniform manner. You will generally not get told the details of what your friend is, or is not, doing with respect to the loan. If things do go poorly and your friend isn't telling you, you will get a collections notice. This puts you in a very tenuous position, because you may find out on very short notice that you owe a large amount of money.

It's also important to point out that unless you talk your friend into putting your name on the title (which is rare), you have zero ownership or rights to the value of the vehicle. Your friend could sell it for whatever price they want, without telling you. They could total it. They could trade it to a meth dealer. If your friend defaults on the loan, and the bank can't find the car to repossess it, you have no way of forcing your friend to sell it as a way to get some of the debt paid back.

To sum this all up and make it very clear: Cosigning for a loan is an act of pure charity:

• You are taking on 100% of the responsibility with 0% of the benefit or value.
• You have no rights or ownership to the vehicle.
• You may find yourself on the hook for the full loan amount, with very short notice.
• You may also find yourself with a ruined credit score, on very short notice.
• You may wake up one day to a scary looking repo man knocking on your door asking you where the car is.
• Your ability to borrow for your own uses will be reduced, since the loan will show up as debt on your credit report.
• Your friend can do whatever they please, and you are left on the hook.

In case it isn't clear, you should not cosign a loan unless you are willing to be fully responsible for the entire loan amount, while receiving nothing in return.

To answer the question in your title,

cosign a car loan, what is true $ risk

The "true risk" is the full amount of the loan. You can't count on repossession reducing that risk, because many vehicles are never repossessed.

Answer 3

My rule: If you want to give them the money, and you can afford to give them the money, then give them the money. If you don’t want to give them the money, or cannot afford to, then don’t give them the money. NEVER co-sign for a loan.

If you give your friend the cash, assume the money is gone. If you co-sign, assume the money is gone except there will be other negative consequences for you.

Answer 4

The first cost is that until the loan is completely paid off the outstanding balance of the loan will be counted by lenders as a current debt. The required monthly payment of the loan will be considered as your responsibility, and if you are applying for other credit, for example a car loan for you, or a mortgage for you, then this car loan will be part of your monthly required expenses. This existing loan could limit your options until it is paid off.

You should see an immediate lowering of your credit score, because you have had a hard pull done, and you have agreed to accept the loan and monthly payment. Over time the impact of the hard pull will diminish, and your score could even go up in the end because your have another successful use of credit in your credit file.

If your friend falls behind then you will have a choice, step in as you have agreed to do, but realizing that they have probably missed a couple of payments so there will be item in your credit history that you missed payments. Or let it be seized and have a very bad mark that will stay for a long time.

Depending on the situation you might have to make up the missed payments, and then hope it doesn't happen again; or make the missing payments and work with your friend to make sure it doesn't happen again by convincing them to sell the car quickly. or something in between.

Note that the obligation doesn't go away if they move across the country, or if they stop talking to you, or if they move out of the country and you have no idea where the car is.

Answer 5

Your $ risk exceeds the cost of the car and may include your net worth and possibly future income. If your friend does something dumb while driving that car, injures someone, and is not properly insured you could be held liable.

This was learned when someone close to me applied for an umbrella policy. Those that cosign a car are considered owners of the car and as the owner of a device that causes harm to someone you can be held liable. Are you ready to assume that risk?

Also we are talking about a 12K car here. You assume that if payments are missed, the car will be quickly located and sold for a decent value. It is likely that the financing company will not even attempt to locate the car, and if they do, it will be sold for a very small percentage of the value with associated fees.

Your likely risk is for about 10K (the loan plus late fees). The possible risk is for all that you own, including future income.

Cosigning is just a really dumb idea that you are free to make.

Answer 6

Unfortunately, the risks of co-signing a loan greatly outweigh the benefits. So, before agreeing to co-sign, understand the possible dangers:

1. Increases your Debt to Income Ratio: Because you're liable for this balance in the event of default, being a cosigner can decrease your ability to get new credit. But this isn't the only consequence of a higher debt to income ratio. Co-signing a loan can also lower your credit score because the amounts you owe makes up 30% of your FICO score. Thus the more debt you have, the lower your credit score.

2. You Could Ruin Your Credit: Remember, the car loan appears on your credit report. Thus, any lateness or skipped payment is noted on your report. So, proceed with caution and seriously consider whether co-signing is worth the financial and credit risk.

However, for co-signing to make sense, honestly examine your financial situation to see if you can afford the payments in the event of default. If you can't, don't take the risk.

As simple as that.