When a family member or friend needs help getting a loan to buy a car, either because they have bad credit or insufficient income, you may be asked to co-sign the loan. Agreeing to add your name to someone else’s car loan as a co-signer means you are responsible for payments if the primary borrower falls behind and fails to keep the loan current.
But with the exception of a few special cases, agreeing to co-sign a car loan will not affect your own car insurance policy or the insurance rates you pay. There are still insurance ramifications to keep in mind before becoming a co-signer.
Co-signing a car loan probably won’t affect your insurance
Helping someone buy a car by co-signing their loan is not a commitment to be taken lightly. The most significant of the potential consequences is that if the person fails to make the payments on the loan, you will be liable for the debt. By co-signing, you assume a substantial financial obligation. And if the loan goes into default, it will impact your credit as well as the primary borrower’s credit.
However, simply co-signing a loan is unlikely to have any impact on your car insurance policy or the rates you pay for your vehicle coverage. If you don’t plan to drive the vehicle you’re co-signing for, there shouldn’t be any ramifications for your car insurance.
“Co-signing a car loan shouldn’t impact your own insurance premium, unless, of course, you decide to add the co-signed vehicle to your own insurance, in which case your premium will increase to reflect the additional vehicle,” says Douglas Heller, director of insurance for the Consumer Federation of America and nationally recognized insurance expert.
Exceptions to the rule
There are a few specific exceptions to this rule – occasions in which being a co-signer on a car loan may affect the coverage of your own car insurance policy. In particular, if you live under the same roof as the main borrower of the loan and are already covered by the same insurance as the person buying the car, your insurance will be affected. In such cases, the policy premium will increase to reflect the additional vehicle.
There may also be other instances where there are insurance ramifications associated with being a co-signer. Heller says living under the same roof as the owner of the vehicle or regularly driving the car could require you to be added to the insurance policy.
Co-signers are generally not responsible for accidents
There are many factors to consider when co-signing a car loan for someone else, including: Who is responsible if the vehicle is involved in a collision or accident of any kind? As a co-signer and not a co-owner, you are generally not liable in such cases.
“Co-signing an auto loan doesn’t make you responsible for the primary borrower’s misbehavior, drunk driving, or even driving without auto insurance,” says Steve Sexton, financial advisor and CEO of Sexton Advisory Group.
However, the liability limits change if your name appears on the vehicle title as a co-owner, which would be the case if you were a full co-applicant on the loan, not just a co-signer.
In this scenario, you could be held responsible for damages in the event of an accident if the driver of the vehicle you co-own turns out to be responsible or the one who caused the accident. Additionally, if the accident results in a lawsuit, you could potentially be liable as well.
Being a co-signer vs being a co-owner
Being a co-signer on an auto loan is not the same as being a co-owner. You are only a co-owner of a car if you are a full co-borrower on the car loan and your name appears on the title of the vehicle with that of the other borrower. Joint owners have an equal interest in the asset, which is the vehicle itself, and are also responsible for keeping loan payments up to date if a loan is used to purchase the car.
As a co-signer, however, you will have no legal ownership or interest in the vehicle. And your name will not be listed on the title of the vehicle. You are simply obligated to pay the loan if the primary borrower defaults. A co-signer essentially acts as a guarantor for the primary borrower, meaning you agree to step in and take responsibility for the unpaid debt should the need arise.
The bottom line
Co-signing a car loan for a friend or loved one can be a big help for the primary buyer, not only helping them buy a vehicle, but also helping them build credit when needed. But before taking such a step, think carefully if you are ready to assume such a financial obligation. You could even call your insurance company to determine for sure if your insurance policy will be affected.