Never Cosign a Car Loan for Anyone
Published January 16, 2012 | Updated March 10, 2019
Our consumer advocate team has fielded numerous complaints over the years from people (victims) who cosigned a car loan for another person, who then defaulted on the loan, which then obligated the victim who cosigned on the car loan to now be responsible for that loan. This epidemic is large enough to prompt us to reiterate our strongest warnings to anyone who is considering pursuing this toxic waste of financing gimmickry.
Keep in mind through all of this, that the car dealer and their finance manager inside the business office are the only people who prosper when cosigning an auto loan is involved. Let us guide you now through the real life intertwining complexities of cosigning a loan, and detail what the impact is on all the involved parties.
What is cosigning an auto loan?
First, let's define what a cosigned car loan is. Cosigning an auto loan 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, a girlfriend, a boyfriend, or family member who cannot get any type of credit including a car 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.
Before you even step foot inside any car dealership, educate yourself first with our consumer advocate advice guide on Car Loan Financing Tips and Scams first.
Because the car buyer cannot qualify for the car loan on their own, they ask you to cosign the loan for them, meaning you are guaranteeing the payment of the car 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 good credit laurels, knowing that if the buyer fails to pay the loan, they can come after you for it and be sure to get paid. This is what is so underhanded about cosign loans; the car dealer is setting you up for failure, knowing your friend who is not credit worthy material is likely to stop making payments on the car.
Too many well-intentioned people who just want to help a friend in a financial bind or lover fall into this trap. They all think the same thing: "What could go wrong? My friend has a job, he's making money, there won't be any issue if I just sign my name to a piece of paper."
Who really wins this game when you cosign a car loan?
You're just a pawn in a vicious game where high commissions are at stake. It's a winning proposition for the dealer and a losing one for you. Cosigning was designed specifically to guarantee the car dealer that there will be a sale of a new or used car 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." The only formality here is that you are likely to own that debt in your name when your friend defaults on payments.
The car salespeople will do and say anything to make you sign. Their job is to not let you walk out of there without buying. When they run your friend's credit history and discover the bad news of an inadequate credit score, they will turn to you to co-sign the auto loan for them, anything to preserve their precious sale, and their commission.
This is a very common scam pulled on unsuspecting people like yourself, thinking you are helping a friend. The real danger of this "formality" is that it is like a Velociraptor, unseen until it bites you in the butt months later. 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? Do you think that cosigning a car loan is "just a formality"? Let us give you the real formality here.
Why cosigning a car loan is a really bad idea for you
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 look at that person's credit history and determine that they cannot give that person an auto loan. They know something that you should already 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. Don't overlook this just because the person buying the car is your friend. We have plenty of friends who are walking financial train wrecks.
So, when the credit bureau people who are wise are telling you that a car 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 being responsible for, and paying that car loan on a car that is not even yours.
You are overturning the advice of credit bureaus who are much smarter than you, with decades of data telling them your friend will default. Someone with bad credit has no business taking out a car loan, and you have no business helping them get a loan. This bad credit problem has existed since ancient biblical times, even long before financing was adopted to vehicle purchases, so heed the lessons learned by a few thousand years of people getting their good credit rating destroyed.
Disadvantages of cosigning a car loan for another person
- You are guaranteeing that the car loan which your friend is applying for will be paid back. Say that again over and over until it sinks in.
- It causes sticky situations when a boyfriend and girlfriend cosign then break up later.
- If the person defaults, you must start making monthly payments for a car you are not even driving. You may even have your own car loan to worry about. Congratulations, now you have 2 loans.
- If you don't pay back the car loan once your friend defaults, the car gets repossessed, and your credit gets ruined with your friend's credit. Congratulations, now you can't even get a car loan when you'll need it most.
- When you cosign a loan, your credit history can take a ding, your good name and credit can be diluted now because that cosigned amount is a potential loan balance waiting to happen should your friend default on the payments. When you cosign a loan it will show up on your credit report, and your potential creditors will take that into consideration.
- Sometimes dealers trick you with the Straw Purchase Scam. You think you are just cosigning for a friend, but they make you sign the line as the primary borrower, now the car loan is in your name!
White paper study: Our neighbor's horrific nightmare story on cosigning an auto loan
One of my neighbors lived through pure financial agony after cosigning for her daughter's boyfriend. Mistake #1,don't cosign a car loan for someone outside your family. Let his mother cosign for him. Our neighbor's daughter was dating a man who was trying to get a new car, and apparently this credit deadbeat boyfriend could not qualify for the car loan on his own.
Our neighbor's daughter could not cosign for him on the car loan either, as her credit was just as bad. They begged her mother to co-sign for him, and she fell victim to this horrendous trap. She broke down and cosigned for her daughter's loser boyfriend. Three months later... oh, you've heard this one before? The daughter and her boyfriend broke up. Never saw that one coming, huh?
The loser boyfriend then stopped making payments on the car, and our 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.
We suspect the boyfriend was scamming the girlfriend all along, dating her for the sole purpose of acquiring that car. Once he got his car, he was gone, leaving skid marks. Greedy people like this will cross any boundary to satisfy their lust for possessions. The mother has been on a crusade to warn others, to learn from her mistake and never co-sign for anybody. Almost in tears, she stressed it repeatedly when we brought her into lecture at a financial responsibility class we were teaching.
Another white paper study from a CarBuyingTips.com visitor
Here's another bit of anecdotal evidence from one of our CarBuyingTips.com visitor car financing horror files. A woman named "Jennifer" had cosigned a truck for her boyfriend. Sometime later they broke up... oh, you've heard this one too? Jennifer went into trade in the truck because she did not want it anymore.
Guess what, deadbeat boyfriend's 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 his ex-girlfriend to get his name off of the title, even though she was forced to make the monthly payments on the car loan, and he no longer had anything 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 do anything with the truck, because boyfriend's name is on the title. Hey, here is an idea for her, 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? One justifiable case
Hold on, while we stop laughing and catch our breath. You might be wondering if there is ever a time when cosigning makes sense? Not really, and we should not keep on trying to justify it when all the conventional wisdom and research data we have on the subject says it is a bad idea to cosign a car loan for someone else.
There are however a couple of cases that might be acceptable in our consumer advocate eyes. One such case is a parent cosigning a car loan for a son or daughter. This will help them establish that critical Auto Fico score, which grades them terribly low if they have no car loan experience in their credit report history file. This requires your full grasp of this situation and complete understanding who will be paying the loan and when.
For your young college freshman student just now starting out in adult life, this can be a great way to buy them a car, then co-sign the auto loan with them, then pay off that auto loan after 6 months or so, long enough to establish a history of successfully paying their monthly loan payments on time. Remember that by co-signing the loan for your kid, you are pretty much expecting that you are going to be paying it off. This can be a powerful tool for you in the right hands, or a ticking time bomb in the wrong hands.
But even cosigning a loan for your kid is risky, because you don't really know if your son or daughter will be responsible to pay it on time if that was indeed the agreement between the both you.
Your kids should try to establish their own credit like the rest of us did. They can apply for and obtain 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.
Another justifiable case for cosigning a car loan
Another scenario where cosigning a car loan might make sense is a husband and wife buying a car, 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 have enough income to justify a car loan, and one of you is still trying to clean up bad credit from a previous marriage for example, then this is acceptable.
But please remember the risks here, if you default, both of your credit scores, husband and wife, will take the hit, and this can be financially stifling for both of you going forward. Any default here could keep you from opening any new lines of credit, it can disqualify you for a mortgage.
Another drawback of cosigning an auto loan for a spouse is you could also be rejected for an apartment rental if your credit file becomes degraded by black marks on your credit history from a defaulted co-signed car loan.
If you do plan to borrow money for a new car, at least read our consumer advocate advice guide Car Loan Financing Tips and Scams first. 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.
About The Author: Jeff Ostroff
A lifelong consumer advocate with over 20 years of unparalleled expertise, Jeff is the Founder, CEO and Editor-In-Chief of CarBuyingTips.com. As chief consumer advocate, he oversees a team of experts who cover all aspects of buying and selling new and used cars including leasing and financing.
For decades, Jeff has been the recognized authority on vehicle purchasing, sought out often by the media for his decades of experience and commentary, for live call-in business radio talk shows and is cited often by the press for his expertise in savvy car shopping methods and preventing consumer scams and online fraud. Jeff has been quoted in: CNN, MSNBC, Forbes, New York Times, Consumer Reports, Wall Street Journal and many more.