November 02, 2023
If you cosign for an auto loan and the primary borrower stops paying, it can cause some damage to both of your credit scores. Or worse – if the car is repossessed it can devastate both your credit score and the primary borrower's credit score. Though you can't be the one to initiate your removal from the loan, here’s what you can do if the primary borrower stops paying on an auto loan you've cosigned for.
Responsibilities of the Cosigner
Cosigners have the same obligations as the primary borrower if the loan goes into default, but the lender is going to contact the cosigner to make sure the loan gets paid before this point.
When someone agrees to cosign a car loan, they agree to share responsibility with the primary borrower as a backup payer. This means if the primary borrower stops making payments on the vehicle, the cosigner is responsible for making the payments so the loan doesn’t default and end in a repossession. This increases the primary borrower’s chances of getting approved for financing because you're agreeing to pick up the slack on the auto loan if they fall behind.
With that being said, if your primary borrower stops paying or is about to stop paying on the loan, it could get ugly unless you both act fast. Both of your credit reports reflect the activity of the loan, including on-time, missed, or late payments. If the loan goes into default, it’s reported on both of your credit reports as well.
If things aren’t going as smoothly as you hoped when you cosigned, there are ways to resolve the situation and protect your credit, but the primary borrower has to be the one to act.
Is A Cosigner's Credit Score Affected?
If the loan isn't kept out of default, the cosigner’s credit score is going to be affected because they’re also responsible for the loan. The cosigner’s credit score is likely higher than the primary borrower’s since they were needed to help get the loan in the first place, and any negative marks end up affecting their score even more than the primary borrower's.
This means the cosigner and primary borrower need to keep in touch regarding the auto loan. It’s important that they keep communication open, discuss any “what-ifs”, and come up with a plan B if the primary borrower can’t pay.
They also should reach out to the lender before it’s too late – most lenders want to help borrowers avoid repossession and may be able to work with the situation.
Ending a Cosigned Car Loan
As the cosigner, you can't remove the primary borrower from the loan. Unfortunately, since you have no legal rights to the vehicle, the primary borrower has to take the initiative to remove someone's name from the contract. Cosigners can’t take possession of the vehicle they cosign for or remove the primary borrower from the loan since their name isn’t on the vehicle's title.
Getting out of an auto loan as a cosigner isn’t always easy. However, knowing what you signed on for as a cosigner is key. You're not out of options.
There are a few ways to get out of a cosigned car loan, but some of your available options depend on the status of the loan. Here are five possible ways to resolve the issues within a cosigned car loan:
Help the borrower with the payments – As the cosigner, you have an obligation to the loan, so the lender typically asks you to cover the car payments if the primary borrower stops paying. If you have the funds, your responsibility is to help the primary borrower with the payments to avoid missed/late marks that hurt both of your credit scores. This option is typically the easiest to achieve. But be clear with the borrower on how much you can help and see if or when they can get back on track.- Talk to the primary borrower about deferment – If the borrower is going through a rough patch and you’re worried about them falling behind, talk with them about deferment plans. These plans involve pausing the car payments for a little while, typically around one to three months. The skipped payments are usually added to the back end of the loan, allowing the borrower time to catch up and resume paying as normal.
- Ask the primary borrower to refinance – Refinancing replaces the current car loan with another one for the same vehicle. Refinancing is the most common way to remove a cosigner from an auto loan. If the primary borrower qualifies they may be able to remove you from the loan. The primary borrowers must qualify for refinancing alone, and most often, can’t be behind on payments. Since you can't remove the primary borrower as a cosigner, this is one of the easiest ways for them to remove you and keep their vehicle.
- Ask them to sell the vehicle – Selling a vehicle and paying off the loan with the sale proceeds ends the loan contract. If the primary borrower is having trouble keeping up with the auto loan and can’t refinance, then selling the car and getting into a more affordable one on their own could be a decent solution.
- Voluntary surrender – This is the last resort, but if there’s a loan default ahead, surrendering the vehicle could save both you and the primary borrower some headaches. If the primary borrower is about to default, a repossession likely comes next. Repossession isn't cheap, and it can rack up fees from a recovery company and storage facility until the car is sold at auction. If the primary borrower can't pay, the lender has the right to collect from you as the cosigner. A voluntary repo saves money compared to a traditional one, but it’s still reported as a repossession on both of your credit reports.
Help the borrower with the payments – Not all of these situations are for every individual, but they’re worth considering. The first three options allow the primary borrower to keep the vehicle, which may be ideal for them. But if they want out of the car loan because they can’t afford it, then selling it or surrendering it may make the most financial sense for everyone.
