If there is a person who applies to purchase or lease a vehicle and this applicant’s credit, income, or both, do not meet the dealership’s requirements, that dealership will typically require a co-signor. You may be asked by a friend or family member with low credit or low income to co-sign on a lease or contract to purchase a vehicle. You need to think carefully before you co-sign for a friend or family member.

What co-signing means.

When you co-sign for a loan, you become legally responsible for that loan just as if you were the individual applying to purchase or lease the vehicle, even if you never had possession of the vehicle. If you co-sign on a loan and the individual does not pay the monthly payment, that person has defaulted on the loan, and the dealership or lender may seek legal action against the individual and the co-signor.

The co-signor will legally be responsible for paying back the loan. The dealership could seek legal action against the original loan holder and any co-signor to recoup any money that is yet to be paid on the vehicle plus fees for defaulting on the loan, including repossession fees, late fees, and attorney’s fees if the dealership sought the assistance of an attorney to get back the monies owed.

Co-signing on a loan can also show up on your credit report, which can increase your debt-to-income ratio (DTI). The DTI income is looked at by lenders when you apply for a loan, and because your DTI ratio will increase if you co-sign for a loan, this could be a reason to deny you a loan or still give you a loan with less favorable terms, such as a higher interest rate, requiring you to get a co-signor yourself, or other such unfavorable terms.

Before You Sign.

Before you agree to co-sign on an auto loan, you should think carefully. Ask yourself if you would be able to afford the payments yourself on this car loan if the loan was to go into default. If you co-sign on the loan, the lender can come after you for the money that is owed on the vehicle plus fees. If you cannot afford the payments yourself, you should think twice before co-signing on the loan.

Ask yourself what the reasons are this person is asking you to co-sign on this loan. Are they asking you to co-sign because they have low credit, low income, or both? You should ask questions about whether this individual will be able to refinance the loan in the future to take your name off as the co-signor. They may be able to remove your name as a co-signor if their income increases or their credit increases. If you have questions, you should speak with the lender themselves about the ability to remove your name as a co-signor in the future. If you are not allowed to remove your name as a co-signor, you should think twice before co-signing on the loan.

Ask yourself what your relationship is with the person asking you to co-sign on the loan. Normally, it is close friends or family members that will ask you to co-sign on a loan. If you do not know the person well when they ask you to co-sign on a loan, do not co-sign. You should ask yourself whether you trust this person to be able to make the monthly payments and comply with all the provisions of their contract or lease. For example, the person will be required to keep insurance on the vehicle; if they fail to do so, that could lead to a default on the vehicle. There are other ways to go into default besides not paying the monthly payments. The lease or purchase contract will provide guidance on what is considered going into default and what the lender’s rights are if you go into default. Even with close friends and family members, you should think twice before co-signing on the loan.

Ask yourself whether you, as the co-signor, are going to track the loan and be sure that the individual is complying with the lease or purchase contract and are making the monthly payments. If you co-sign on the loan, you are legally responsible for the loan as well. Most lease contracts or purchase contracts contain a provision that allows the lender to accelerate the loan; this means that the dealership could request that you pay the entire loan balance in full immediately. If you go into default on the loan, this is allowed as it is what you, as the co-signor, agreed to as well as the individual who purchased or is leasing the vehicle. You should think twice about co-signing on a loan if you do not have the ability to check on the loan monthly.

What can you do?

If you do co-sign on a loan and the loan goes into default, the dealership or lender can seek legal action against you. They may get a judgment against you for the full amount of the loan. If you do not have the ability to pay for the loan amount, the only way to get rid of this debt is to file for bankruptcy. If this happens to you, contact a lawyer of your choice here or call our Helpline to see if you qualify for our free services at 501-376-3423, Monday-Friday, 9 am-4 pm.

AUTHOR: DREW RODGERS, STAFF ATTORNEY FOR THE CENTER FOR ARKANSAS LEGAL SERVICES