What Happens to a Cosigner When a Car is Repossessed?

If you were a cosigner on a car loan or car lease, and the owner of the car defaults on the loan, causing the car to be repossessed, you might be wondering, what happens to the cosigner when the car is repossessed? We will answer this question in much detail below.

What Happens to a Cosigner When a Car is Repossessed?

When a car is repossessed, the cosigner is just as liable for the repossession as is the person who financed or leased the vehicle. So, if the borrower fails to make payments on his car, the late payments will be reported on both the credit of the borrower and the cosigner, causing significant damage to both credit scores. Furthermore, a repossession will appear on both the main signer and the cosigner’s credit report, causing further damage to both credit scores.

This is so because when a cosigner cosigns a loan, he is agreeing to be responsible for repaying the debt in the event that the borrower fails to make payments on it. When the primary borrower fails to make payments on his car loan, the lender will come after the cosigner for repayment of the debt.

Usually, when a car is repossessed, the lender will take possession of the car, sell the vehicle, and come after the borrower and the cosigner for repayment of the deficiency. The deficiency is the difference between what the borrower owed on the vehicle and how much the vehicle was sold for.

For example, if the borrower owed $14,000 on his car, and the lender was able to sell the car for $10,000, the lender will come after the borrower and the cosigner for the deficiency (remaining $4,000). This is usually the case because lenders are typically unable to recoup the full amount owed on repossessed vehicles.

If the borrower and cosigner do not pay the deficiency, the lender may sue both the cosigner and the borrower for the remaining deficiency, or the lender may sell the deficiency (remaining amount owed) to a collection agency. The collection agency will then aggressively attempt to recoup the remaining amount from the cosigner and the borrower.

What Happens to a Cosigner’s Credit When a Car is Repossessed?

When a car is repossessed, a cosigner’s credit will sustain significant damage as if he had taken out a loan to purchase the car himself. This is so because when a cosigner co-signs a loan, he is agreeing to make the payments in the event that the main borrower fails to make them. As such, any late payments, defaults, and repossessions will appear on the cosigner’s credit report just as they would appear on the borrower’s credit report, causing significant damage to both the borrower and the cosigner’s credit scores.

That said, not only will the repossession appear on your credit report, other events that lead up to the repossession may be added to the cosigner’s credit report. Such events include the following:

  • Late payments
  • Defaulting on the loan
  • Collections Account
  • Court judgments

How Long Does a Repossession Remain On a Cosigner’s Credit Report?

A repossession will remain on a co-signer’s credit report for 7 years from the date that the borrower became delinquent on making his car payment. After the 7 year period, the repossession will automatically be removed from the cosigner and borrower’s credit report.

In the event that a repossession is not removed after 7 years, you can file a dispute with the credit reporting bureau reporting the repossession, asking them to have it removed because more than 7 years have passed since the borrower became delinquent on the car payments.

Note: A repossession will have the biggest impact on the cosigner’s credit score when it is first reported. As the repossession ages and more times passes since the repossession first appeared on your credit report, its effect on your credit score will lessen. Typically, you should see a substantial improvement in your credit score within 2 years of the repossession being added to your credit report. Once the repossession is removed from your credit report, it will no longer affect your credit score.

How Does a Car Repossession Work?

When a borrower defaults on his car loan, usually the lender will give the borrower several chances to make payments on the loan. If the borrower fails to make payments on the loan, the failure will trigger the default terms in the car loan agreement. Usually, when a default is triggered, the loan contract gives the lender the ability to repossess the vehicle to satisfy the outstanding debt.

Usually, a person’s car is not repossessed immediately after missing a single payment as lenders give borrowers a chance (usually up to 3 months) to make payments and get out of default. However, some lenders will begin the repossession process immediately after a missed payment. The amount of time it takes the lender to begin the repossession process can usually be found in the loan or lease agreement. Some lenders will act immediately, attempting to repossess a vehicle as soon as the borrower misses a single payment, while other lenders will attempt for weeks and months to collect the outstanding amount.

Repossessions are possible because the lender owns your vehicle until the vehicle is completely paid off. This is so because lenders almost always use the vehicle as collateral for the loan, allowing the lender to repossess (take possession) the vehicle as soon as you become delinquent on paying your loan.

In most states, the lender is not obligated to give the borrower advance notice that it is going to repossess your vehicle. For example, if you’re out shopping and you’ve missed several payments on your car loan, the lender can send a tow truck to tow the car from the shopping center’s parking lot without giving you advance notice.

That said, lenders are not thrilled when they have to repossess a vehicle, so it’s usually a bad situation for both the lender and the borrower. Repossessions are bad for the borrower because the lender will likely sell the car for less than what the borrower owes on it.

Repossessions are bad for the borrower and cosigner because the repossession will appear on of their credit reports, causing significant damage to their credit scores. Furthermore, both the borrower and the cosigner will be liable for paying the remaining amount on the loan. Also, if the remaining debt is sold to a collection agency, the collection agency will come after the borrower and the cosigner for the deficiency, which is the difference between what the lender sold the car for and what the borrower owed on the loan.

Is a Cosigner Liable for a Repossession?

Yes, a cosigner is just as liable for a repossession as is the borrower. This is so because when the cosigner signs a loan agreement, he or she is agreeing to make payments on the loan in the event that the borrower fails to repay the loan on time. So, although you may have thought that merely signing your name on a friend or relative’s loan agreement only helps them obtain the loan, you’re wrong because you are basically signing, agreeing that to take responsibility for the loan if the borrower fails to repay it on time.

So, it should be clear that if the borrower defaults on the loan and vehicle gets repossessed, you’re equally liable for the missed payment, the repossession, and the deficiency. So, if the borrower fails to make payments on the loan and you want to avoid damage to your credit, you should step in and make payments on the loan.

So, you might be asking yourself what is a deficiency balance? A deficiency balance is amount that you owe if a lender sells your car and the amount the car sold for is less than what the borrower owes on the car. A cosigner is responsible for the deficiency balance.

For example, if you cosigned a loan for your brother, and his vehicle gets repossessed for non-payment. If the lenders sells his vehicle for $10,000 and he owed $14,000 on the vehicle, the deficiency balance would be $4,000. Both the borrower and the cosigner are liable for the remaining $4,000 balance.

If there is a deficiency balance, one of two things may happen: the lender may try to collect the deficiency balance from the borrower or cosigner, or the lender may sell the debt to a collection agency, which will then come after the borrower and cosigner for the outstanding amount that’s due.

To avoid problems, you should consider negotiating with your lender or the collection agency to settle the deficiency balance. If the lender has not yet sold the debt to a collection agency, you should try negotiating with the lender because if the debt is sold to a collection agency, the collection agency can cause additional damage to your credit score by reporting a collection account on your credit report.

How Can a Cosigner Improve His Credit Score After a Car is Repossessed?

A cosigner can improve his or her credit by following the tips below:

  1. Payments – Even if you’ve had a repossession and late payments added to your credit report, make sure that you continue to keep your other accounts in good standing. Your payments history accounts for 35% of your credit score, so continuing to make your payments on time will improve your credit score.

  2. Reduce Balances – Reducing the balances on your accounts will help your credit score. This is so because your credit utilization (how much of your available credit you’re using) accounts for 30% of your credit score. So, paying down balances will dramatically improve your credit score. You should always strive to keep your credit utilization at or below 10% and never exceed 30%. If you exceed 30% credit utilization, your credit score will drop.

  3. Credit Applications – You should refrain from submitting too many applications for credit cards and loans. This is so because every time you apply for a credit card or loan, a hard inquiry is added to your credit report, reducing your credit score. Although a single hard inquiry will not drop your credit score by much, having too many hard inquiries will significantly reduce your credit score.

  4. Old Accounts – If you have old accounts that are in good standing open, you should keep them open. This is so because the average age of your accounts impacts your credit score. the older your accounts, the better your credit score will be.

  5. Review Credit Report – You should periodically check your credit report. This will help you detect any inaccuracies that appear on your credit report. For example, if a negative mark or account that does not belong to you appears on your credit report, you should dispute it to raise your credit score.