How Can Car Co-Signer Avoid Credit Crash?

Dear Debt Adviser, I co-signed for someone's car, and now he does not have insurance coverage and is making late payments on the loan. As co-signer, what is the best option to save my credit? Less than $10,000 is owed on the car loan, and everything else on my credit is nearly perfect. -- Zee

Dear Zee, Hold up your right hand, and take an oath with me right now that you will never, never from this moment forward, co-sign for another loan. Seriously, unless you can afford to take on the loan yourself AND wouldn't mind paying it, you should never co-sign a loan.

That advice, of course, does not help with your current situation, but it might help others reading about your problem, so they won't also sign on the dotted line. If you are concerned about saving your credit, and even if you're not, you may need to make payments on the car loan. The reason is if the car owner stops making payments, the lender will expect you to make them as the co-signer. And because you are the co-signer, the lender has any and all collection remedies to pursue to get you to pay, just as if the car were yours. For instance, you could be sued in court, and the lender could try to have your wages garnished, if that's allowed in your state. You will want to take action before things progress that far.

The source of the problem is the person you co-signed the car loan for. I suggest you get hold of him to start resolving the issue. If it were me, I'd get hold of him around the neck -- but seriously, having a serious conversation may be a good place to start. At this point, your credit is already somewhat damaged because of the late payments. However, if the loan payments are caught up and brought current, the damage will be stopped and not get worse. So, you have the options of: convincing him to make up any past-due payments and then continue to make the monthly payment on time; or considering doing all of that yourself if the other borrower won't or can't. The only way you can be sure this loan will not negatively affect your own financial situation is if someone makes the car loan payments as agreed.

The fact that the vehicle is not insured is a much larger risk for the car owner than for you. As a co-signer, you are simply a loan guarantor and are not likely included as an owner of the vehicle. Therefore, you do not have any rights to the car. If it becomes a total loss due to an accident, the owner will not have a car, but you were never entitled to the car anyway. (But the loan will still have to be paid, regardless.) However, if you are on the title as a co-owner, I suggest you check with an attorney to be sure you understand any potential liability you may have.

If you decide to make some payments, you might consider obtaining a loan or using saved funds (though not retirement money) to pay off the car loan. Then, your friend can repay you, and your credit will be safe. Whether you'd actually get your money back is problematic. In the end, your position is not a strong one, and if the other borrower is family or a friend you don't want to lose, you may just have to consider your experience as a co-signer an expensive life lesson and move on.

Good luck!

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