Co-signing a Loan: All Risk, Little Reward

Co-signers lend their names and good credit histories to the primary borrower, usually when the other borrower cannot obtain credit on his or her own. A parent may co-sign for a child who does not yet have a credit history. Other times, someone may be asked to co-sign by a friend or relative whose credit is tarnished, has negative marks in their credit history, or a low credit score.

Co-signing a loan does not mean serving as a character reference for someone else. Here’s what you should know before you co-sign a loan.

You’re Liable

When you agree to co-sign on a loan, you are liable for payment of the loan. You risk having to repay any missed payments immediately, or having to pay the full loan balance if your co-borrower defaults.

If the borrower defaults on the loan, the lender can use the same collection methods against the co-signer, such as demanding repayment of the entire loan, filing a lawsuit, and garnishing bank accounts after a judgment.

Credit score(s) may be impacted negatively by any late payments or defaults by either co-borrower. If the primary borrower dies, loses a job, goes through divorce, files bankruptcy, or otherwise fails to make payments, all responsibility for meeting the terms of the account generally transfers to the co-signer.

In some cases, the person who thought they were merely a co-borrower or guarantor was really listed in auto finance documents as the primary borrower. Be aware that if your co-borrower is primarily responsible for timely monthly payments, your credit score could suffer if he or she pays late, even if the lender did not give you a timely notification of the missed payment.

You Could Be Sued if Payments Aren’t Made

Failure to pay on the loan (or another breach of the loan agreement, like not keeping up the car insurance) means the lender can come after you for the entire balance. The co-signer often gets sued first because their credit is stronger and the bank believes they’re more likely to repay the debt.

It’s Difficult to Remove Your Name from the Loan

Once the account is opened, it’s very tough to remove a co-signer. We often hear stories of car buyers being told by the salesman to return after four to six months, at which time the dealer will supposedly remove one of the borrowers from the paperwork. This is not true, but rather a tactic to sell cars. Both the primary borrower and co-signer need to resolve the account in order to terminate the loan agreement, or obtain the lender’s express permission to remove one of two co-borrowers.

There Are Tax Consequences if the Debt is Settled or Unpaid

The lender might not want to go through the trouble of suing you, so they agree to settle a post-repo deficiency balance for less than the balance owed. This means that you could have tax liability for the difference.

For example, if you owe $10,000 and settle for $4,000, you may have to report the remaining $6,000 as “debt forgiveness income” on your tax returns and pay tax on it. Settling on the account for less than the full sum may also leave a negative mark on your credit report. You may want professional tax advice on this.

Co-signing Could Make it More Difficult for You to Get a Loan

Co-signing a loan may affect your ability to obtain loans for yourself because you have taken on the obligation to pay a friend’s loan.

Before you co-sign for someone, think about whether or not you’ll need to use your credit for your own needs. A lender may deny a credit application if there is too much credit in your name or the balances are too high relative to your income.

Seek Legal Advice

If you have co-signed an auto loan and your co-borrower has defaulted, you may be at risk of a negative listing on your credit report.  Flitter Milz is a consumer protection law firm representing people in matters against lenders, debt collectors and the credit bureaus.  Whether you or the co-borrower has fallen behind on payments or not, Contact Us for a FREE evaluation of whether your consumer rights have been violated.

Understanding the Process of Auto Repossession

Life circumstances, such as job loss, divorce, health issues and death, can make it difficult, or nearly impossible, to keep up with financial obligations. Once we fall behind, it’s difficult to catch up.  Then collectors begin to call, vehicles get repossessed, and our credit reports are impacted.

When borrowers fall behind on car loans, there may be options to discuss with the auto lender, such as deferring payments for a few months and having those payments placed at the end of the loan.  Regardless, it would be beneficial to address late payments with your lender and discuss available options.  If you have fallen behind, the lender may choose to repossess the vehicle.

Car repossession laws vary from state to state. Lenders may have the right to repossess a vehicle as soon as the borrower misses a payment, fails to maintain adequate insurance, or defaults in another way expressed by the contract. Lenders usually do not have to warn you that they are planning to repossess your vehicle.

A repossession company is permitted to come to your property. However, they cannot breach the peace, damage your property or vehicle, use violence, break into a locked garage or fenced area, or repossess your vehicle based on faulty information.

Most states require the lender to tell you what it plans to do with the vehicle and any rights you have. This information usually comes in the form of a letter, called a Repossession Notice, promptly after the repossession occurs. It will detail where you car was taken and inform you of when to collect any personal property left in the vehicle. The repossession notice will state when your vehicle may be sold and if the sale will take place at an auction or private sale.

After a repossession, the lender will offer you the option to redeem your vehicle by either paying the past due payments and repossession fees, or paying off the entire balance of the loan.

If you are unable to make the required payment to redeem your vehicle, the lender will it. Although they are required to get the best price possible, in most cases, the sale amount will be less than the outstanding balance owed on the loan. This situation often results in a “deficient balance” that you will be responsible to pay to your lender. The lender may choose to sue the borrower for the deficient balance.

Most lenders will report auto repossessions to the credit bureaus, whether the repossession was voluntary or involuntary. The listing can appear on your credit reports for up to 7 1/2 years.

Seek Legal Help

For more information on laws protecting borrowers from wrongfully repossessed vehicles, Click here.

Flitter Milz is a consumer protection law firm that represents borrowers that have had a car, truck, motorcycle, boat or RV repossessed within the past six years.  We will provide a FREE consultation and evaluate whether your consumer rights have been violated. Contact Us today.

Auto Repossessions by Crescent Bank

Did you finance a vehicle through Crescent Bank?

Cars are expensive, new or used. Usually, the buyer finances the purchase. A consumer’s creditworthiness affects the cost of credit. A lower credit score can increase the interest rate and impact the length of the car loan.  

The financing of your auto loan through Crescent Bank may have been handled when purchasing a used rental vehicle through one of Enterprise Car Sales locations in Pennsylvania.

Was your vehicle repossessed by Crescent Bank?

Whether you defaulted on your auto loan or not, Crescent Bank may not have handled the repossession properly.  Although you may have fallen behind on payments, there are laws that protect you from improper repossession.  Contact Flitter Milz for a no-cost evaluation. We will review the financing details of your loan and the repossession of your vehicle.

Enterprise Car Sales has several locations throughout Pennsylvania:  
Allentown, Conshohocken, Cranberry Township, Essington, Mechanicsburg, Monroeville, Philadelphia, Pittsburgh, Warrington, West Chester, and Wilkes Barre.