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Never Cosign a Car Loan for Anyone

By | Published January 16, 2012

I get emails from time to time from people (victim) who cosigned a car loan for another person, who then defaulted on the loan, which then obligated the victim who cosigned to now be responsible for that loan. I field enough questions on this topic that I thought I would reiterate my strong warnings to anyone who is considering pursuing this toxic waste of financing gimmickry. Keep in mind through all of this, that the car dealer is the only person who prospers when cosigning is involved. Let me give you the real ins and outs of cosigning. First, let's define what it is.

Image of contract cosigning

What is cosigning an auto loan?

Cosigning takes place when someone you know asks you to co-apply for a loan so they can use your good name to get approved. These requests usually come from a friend, girlfriend, boyfriend, or family member who cannot get a loan based on the merits of their own credit history. Maybe they have too little credit history, maybe they have not established any credit at all yet. Because the car buyer cannot qualify on their own, they ask you to cosign the loan for them, meaning you are guaranteeing the loan. You are signing right next to your friend on the bottom line of the finance application, hence the term "cosigning," because you sign with the other person. Since you have better credit than the person you are cosigning for, the lender will approve the car buyer for the car loan, because the lender is resting on your laurels, knowing that if the buyer fails to pay the loan, they can come after you for it and be sure to get paid.

Who really wins this game?

You're just a pawn in a vicious game. It's a winning proposition for the dealer and a losing one for you. Cosigning was designed specifically to guarantee a seller the sale at your expense. Of course the salespeople lie to you and tell you "it is ok to cosign for your friend," "we do this all the time," "you are in no danger" and other nonsense like "it's just a formality."

This is a very common scam pulled on unsuspecting people like yourself, thinking you are helping out a friend. The real danger of this "formality" is that it is like a Velociraptor, unseen until it bites you in the butt. The salesperson just wants their commission, and they know that 75% of cosigners end up being forced to pay off the car loan after their friend defaulted. Are you still thinking about co-signing for someone? Let me give you the real formality here.

Why Cosigning a Loan is a Bad Thing

Let's look at it from a logical standpoint. When someone with bad credit applies for financing, the underwriters at the banks who are smarter than you and me look at that person's credit history and determine that they cannot give that person a loan. They know something that you should know, which is the person probably will default, and they have decades of historical evidence from millions of other bad credit borrowers to prove it.

So, when the people who are wise are saying a loan should not be given to this person, why on earth would you come in and force a square peg into a round hole by saying "yes that person should get a loan?" The stupidity comes in play because the odds are stacked against you 3 to 1 that you'll end up paying that loan. You are overturning the advice of someone much smarter than you, with decades of data telling them your friend will default. Someone with bad credit has no business taking out a loan, and you have no business helping them get a loan.

Disadvantages to Cosigning a Loan

My neighbor's horrific nightmare story on cosigning

One of my neighbors lived through pure hell after cosigning for someone. Her daughter was dating a man who was trying to get a new car, and apparently the loser boyfriend could not qualify for the car loan on his own. My neighbor's daughter could not cosign for him, as her credit was just as bad. So they begged her mom, my neighbor, who fell victim to this horrendous trap. She broke down and cosigned for loser boyfriend. Three months later... oh, you've heard this one? The daughter and her boyfriend broke up. Never saw that one coming, huh?

The loser boyfriend stopped making payments on the car, and my neighbor ended up losing thousands because she was now on the hook for the car loan. She tried contacting the ex-boyfriend and his mother, and no one was being cooperative. Loser boyfriend and his family should be in jail for stealing from a struggling single mother. Greedy people like this will cross any boundary to satisfy their lust for possessions. She warned everyone sternly, to learn from her mistake and never co-sign for anybody. Almost in tears, she stressed it over and over again.

CarBuyingTips.com visitors chime in

Here's another bit of anecdotal fodder I have from one of our visitors. She had cosigned a truck for her boyfriend. Some time later they broke up and she went into trade in the truck because she did not want it anymore. Guess what, his name was still on the title, and out of jealous immature school girl pettiness (remember this is a guy), he refused to sign the title over to get his name off of it, even though she was making payments, and he had nothing to do with the truck. He was too angry and bitter over breaking up. Now she can't trade it in or sell it or anything. Hey... maybe she should just let the truck get repossessed so that his credit gets dragged down too.

Does Cosigning a Car Loan Ever Make Sense?

Hold on, while I stop laughing. You might be wondering is there ever a time when cosigning makes sense? Not really, and we should not keep on trying to justify it, all the info we have on the subject says it is bad. Now one case that might be acceptable in my eyes is a parent cosigning for a son or daughter. But even that is risky, because you don't really know if your son or daughter will be responsible. Why can't they establish their own credit like the rest of us did? Get a gas card and maybe a Target card while in high school, and pay it off responsibly, so that by college time, they have a credit history that can support buying a car. Husband and wife maybe, but then if one of you has bad credit, maybe you should not be taking on more debt even if the other has good credit.

If you do plan to borrow money for a new car, at least read our Car Loan Financing Tips and Scams chapter first. So if anyone ever asks you to co-sign a loan for them, just say no.

Save yourself like a gazelle from the hand of the hunter and never cosign a loan for anyone.

Author Jeff Ostroff

About The Author: Jeff Ostroff is a consumer advocate, Founding Editor and CEO of CarBuyingTips.com overseeing a team of expert authors. For over 17 years, he's been the recognized authority on car buying, leasing, used cars and financing. He developed sophisticated spreadsheet tools to help consumers negotiate on a level playing field. He is a widely sought out guru, cited by the press for his expertise in savvy car buying and preventing consumer scams. Jeff has been quoted in CNN, Bloomberg, MSNBC, Wall street Journal, Consumer Reports, NY Times, Reader's Digest, and many live call in radio shows. He has covered the automotive space since 1997. Jeff also has extensive experience and expertise in selling used cars for clients on eBay and Craigslist. Connect with Jeff via Email, Twitter or on Google+.

CarBuyingTips.com has affiliate referral relationships with multiple web sites. This means that for many of the links you see on this site, we are paid referral fees for leads generated from visitors that click on links or fill out forms on this site. In some cases we are paid a commission for a purchase made on a site that is linked to from CarBuyingTips.com. Please view our advertising policy page for more information.