Most of us have heard the term “co-signer,” and in fact, there are probably many reading this right now who are currently a co-signer, or perhaps were previously a co-signer or have purchased a vehicle with a co-signer, but for those new to the car buying process, I’m going to explain what a vehicle co-signer is, what they do, why you may need one and what the responsibilities of a co-singer are.

The simple explanation is that many people who are buying a car for the first time are generally young, and between the ages of 16 and 23. Since buying a car – whether it’s new or used – is a major purchase and generally done on credit, there are many first time car buyers who simply don’t have the kind of credit history required to get a loan independently. Other situations – such as poor credit history - also influence credit worthiness. In either situation, banks and lending institutions may ask for a co-signer, someone that will guarantee the loan will be paid back.

A co-signer may also be referred to as a “co-borrower “or a “co-applicant.”

Here’s how it works…

When someone is granted a loan, the bank or lending institution will generally require a third party to guarantee the loan. What this means – in simplest terms – is that if someone who doesn’t have any credit history (or who has s weak or poor credit history) applies for a loan, the third party must sign in addition to the original borrower. This third party then becomes the “co-signer,” “co-borrower” or “co-applicant.”  A co-signer is generally someone who is a parent, sibling, spouse, partner or relative, and in some cases, the co-signer may even be an employer or a friend of the primary borrower. By agreeing to become a co-signer, he or she would then become the responsible party to the debt, should the primary borrower default on the loan.  In other words, the obligations of the co-signer are the same as those of the primary borrower.

As you can see, there really are no benefits to being a co-signer, but many times parents take on the role so that their children can establish credit.

It’s a good idea to remember that if you choose to become a co-signer, the loan will be on your credit report and will affect your credit score – just as if you were the primary borrower.

Keep in mind too, that the bank or lending institution, as well as any debt collectors or agencies, can and will contact you to demand payment, taking any action necessary for repayment of the loan, including collection or wage garnishment – again, just as if you were the primary borrower.

So, before you agree to become a co-signer, here are some things to consider:

1. In some states a creditor can attempt to collect the debt from a co-signer before collecting from the primary borrower.
2. Be sure you can afford to pay the loan, otherwise you could be sued or your credit rating damaged.
3. You are a co-signer for the duration of the loan.
4. You should not co-sign for a loan if you don’t feel good about the situation.
5. Being a co-signer on a loan can keep you from obtaining other credit.
6. If a loan goes unpaid, you may be liable for fees and penalties, in addition to principal and interest.
7. As a co-signer, make certain you have copies of all loan documents, including the Truth-in-Lending Disclosure Statement.

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