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Wife has the mother-in-law co-signed car loan blues

Erica Sandberg

September 29, 2015

QHi Erica,

My husband co-signed a car loan for his mom. He didn't ask me about it. I'm not opposed to helping her out, but I'd like to know if co-signing for her is going to affect my credit. She has had issues with paying things on time, and I worry that late payments will affect me. — Eloise

ADear Eloise,

It can be so difficult to manage marriage and money concurrently. Each spouse should remain at least somewhat independent, but also understand that what one does affects the other. Transparency and fair warning prior to making major financial and legal decisions is essential. Before your husband co-signed for his mother's car loan, he should have explained the situation as well as his intentions.Ask Erica

Now, here you are, after the fact. He is bound to this contract, and you are right to wonder if it has the potential to affect you personally. It does.

Your husband guaranteed a loan for someone who has had issues paying bills on time. There is a reason your husband's mother needed a co-signer. A bank or finance company would have doubts that she would adhere to the terms of the agreement because her credit reports and credit scores showed she had established a pattern of not doing so. Past performance is an indicator of future behavior.

So let's cover what can happen when a person signs for a car loan with someone else.

First, the lender pulls the credit reports of each applicant. If A's rating is positive enough to offset B's negative one, the loan will be granted. At that stage, both parties will be equal partners in the deal.

The loan will show up on the credit reports of each co-signer. Since credit scores are derived from the data on these reports, and debt load is a credit scoring factor, this new, large obligation can result in a lower score. Payment history is the most important scoring factor, so the numbers will eventually rise if the payments are always timely, especially as the balance steadily declines. However, if payments are late, all scores will sink.

This might affect you, the spouse of the co-signer, if you plan to borrow for a new home or car as a couple, or if you and your husband will apply for a credit card together. If this joint loan with his mother goes bad, his scores may not be high enough to qualify for what you and your husband want.

Real trouble will emerge if the loan is not paid at all. Lenders bear the right to repossess vehicles when an account goes delinquent. The consequences can be severe. Here's a basic action timeline:

  •  Late payments trigger collection activity. Anyone legally connected to the loan is subject to demanding and unpleasant phone calls and letters.
  • When several payments are missed, the loan is in default. The lender can then start the repossession process without a court proceeding, and hire a company to take the car from wherever it is parked.
  • The car is stored until the lender auctions it off. The owners may buy it back by paying all of the past-due payments and associated costs of the repossession — including the repossessor's bill, storage and attorney fees.
  • If they can't come up with the cash, the car will be sold. When the purchase price is less than the remaining balance, the original owners will owe a deficiency balance. That will show up on each person's credit report.
  • Can't pay the deficiency balance? The lender can sue either or both co-signers for damages. If the lender wins the case, a judgment will be placed on the credit reports and post-judgment collections may begin, such as a wage garnishment and seizure of assets.

True, none of the above would fall directly on your shoulders, but your husband's hardships probably will affect you because you share a life. It is imperative that this loan is kept in good standing.

I hope that from now on, your husband will keep you in the loop so you can avoid unnecessary, unpleasant surprises.

Got a question for Erica? Send her an email.

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