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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.

  • 6
    You ALSO owe the money. You are ALSO responsible for the monthly payment, you will ALSO be sent to collections if you or your friend doesn't pay and the account becomes delinquent. Do. Not. Cosign. A. Loan. – quid Sep 14 at 23:45
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    The only time that I would consider cosigning would be if it was my child, and I was still providing financial support for the child. – Mattman944 Sep 15 at 14:01
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    Let's make this crystal clear. Cosigning for a loan gets you zero of the benefits (you have no legal right to the vehicle) and 100% of the responsibility (you are fully responsible for the repayment of the loan, no matter what). – dwizum Sep 16 at 13:25
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    I suppose the lien will be with the Bank and with me - Not correct. The bank gets a lien (right to the vehicle). You, on the other hand, literally get nothing. You have no rights to the value of the vehicle or the vehicle itself. – dwizum Sep 16 at 13:26
  • I will be reluctant to cosign a friend that says to have a decent job in the USA for a $12k car loan. Not a chance. – mootmoot Sep 20 at 12:41
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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.

  • thanks for the clarification, I was on understanding that if the friend does not pay, then I can pay the actual loss( loan amount - selling price) of the bank without it being reflected on my credit report. – Raj Sep 15 at 0:40
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    You assume there is a resale value. What if your friend totals the car at his fault? – TomTom Sep 15 at 8:25
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    The bank won't repossess the car unless the loan is in default, in which case you have already defaulted and your credit is already shot. Even if your friend makes perfect payments, the loan is still your debt and affects your credit because it affects your debt-to-income ratio. If you cosign a loan, you should assume that you may have to pay the full loan amount if the person you cosigned for defaults. – David Schwartz Sep 15 at 10:44
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    Also, your credit score could take a big hit way before you even learn about any missed payments unless you are proactive about keeping up on the account. It's not as if your friend's late payments only affect his credit score and then they turn to you later, no, you have equal obligation to pay on time and your credit score will suffer on any late payments that the lender reports. – Hart CO Sep 15 at 13:39
  • I was on understanding that if the friend does not pay, then I can pay the actual loss( loan amount - selling price) - There is no "selling price" unless the car is sold. You have no leverage to force your friend to sell the car, and the only way the bank will sell it (as others have pointed out) is if BOTH OF YOU default. At which point, it's much too late to be worrying about the details because your credit is already in the dumpster. – dwizum Sep 16 at 13:23
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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.

2

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.

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    "If your friend does something dumb while driving that car, injures someone, and is not properly insured you could be held liable." Why? – RonJohn Sep 20 at 4:34
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    @RonJohn: Because the accident could not have happened if OP didn't cosign, someone will present the legal theory that OP is at fault. Whether things actually play out the way Pete's answer says, or the court decides to be reasonable toward the cosigner (at the expense of the injured party!) is hard to predict. Especially if the injured party can discover any evidence that OP knew his friend had dropped insurance, he's unlikely to escape. There are medical bills to pay, the injured person really is innocent, so anybody with money is going to get stuck if the more guilty people have less cash. – Ben Voigt Sep 20 at 17:22
  • @BenVoigt wouldn't the insurance company tell the lender that the driver canceled insurance? – RonJohn Sep 20 at 18:32
  • @BenVoigt also, my son couldn't have gotten in an auto accident if I hadn't sired him. – RonJohn Sep 20 at 18:33
  • @RonJohn: "A number of states have passed parental liability laws that make a parent liable for any resulting injuries and vehicle damage when a minor child causes a car accident" and continues "If, while driving a car, the minor is negligent or engages in willful misconduct, any damages resulting from the conduct can be imputed to the adult sponsor. This is true even if the sponsor had no actual control over the minor, and did not own the vehicle." – Ben Voigt Sep 20 at 18:41
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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.

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