I see this question often. When you co-sign a loan, several problems can arise.
Of course, loans can be made for many reasons. For purposes of this post, however, let us use the example of a relative wanting to purchase a car and needing you to co-sign on the loan.
Why does the bank want a co-signer?
The answer to this is fairly simple. When someone goes to borrow money but does not have good credit, the bank will be reluctant to make a loan.
In that instance, the bank will want a second person who has better credit to co-sign the loan. This gives the bank greater assurance that the loan will be repaid.
What is the effect of becoming a co-signer?
In most situations, the co-signer of a loan becomes obligated to repay the debt to the same extent as the initial borrower.
So, if you co-sign a loan for your relative to purchase a car, the bank will treat you exactly the same as your relative. From the bank’s point of view, both of you are equally responsible for the loan.
It does not matter to the bank that your relative got the car that was purchased with the loan. Your relative may be the sole owner of the car and on the title. Even so, you are equally responsible for repaying the loan.
If my relative does not pay on the loan, can I take possession of the car?
The answer to this is simply “no”. Your relative owns the car, subject to the bank’s lien against the car. The fact that you are a co-signer does not give you any right to possession of the car.
It is for these reasons that should be very careful when considering whether to co-sign a loan for somebody else. When you do, you essentially get all of the risk but none of the benefit of the loan being made.
You can also read here about signing a guaranty on a loan, which is very similar to being a co-signer.
If you need advice about co-signing a loan, call us at the Panter Law Firm.
Panter Law Firm, PLLC, 7736 Old Canton Road, Suite B, Madison, MS 39110.