What Is the Responsibility of an Auto Loan Cosigner if the Original Borrower Dies?

It's bad enough if the primary borrower of an auto loan dies. If you were the co-signer of the loan, the deceased was likely a relative or other loved one. In addition to mourning the loss, you're also stuck with paying off the rest of the deceased person's loan. You can mitigate your loss, however, or prevent it from being an issue if you're considering becoming a co-signer.

If you agree to co-sign a car loan, you're taking on responsibility for the loan should the primary borrower default -- or die. In effect, you're allowing the primary borrower to receive a loan because you have good credit and the other individual's credit isn't sufficient for the purpose. Paying the monthly loan promptly reflects well on the primary borrower and can improve his credit rating. If the primary borrower is late with the bill, that reflects negatively on your credit score.

As the co-signer, you should have all of the loan documentation. In some states, creditors must first try to collect from the primary borrower before going after the co-signer. If that's the case in your state, the lender might first go after the deceased's estate for payment. However, if your state's law allows the creditor to immediately go after the co-signer or if the deceased's estate is worth little or nothing, try to negotiate with the lender. You can try returning or selling the car, but its value might be less than the loan. In that case, you owe the lender the difference between its market value or sale price and the amount of the loan. You could also owe late fees and other costs.

If you co-signed a car loan for a close relative, you might arrange payment privately with the estate, especially if you are an heir. If the deceased person was young and single, it's likely he didn't leave a will. In that case, his possessions are distributed to heirs according to his state's laws of intestate succession. By law, an individual's estate must pay his own debts out of any assets he had. However, since you are legally responsible for the debt, the lender will go after you for payment, not the decedent's estate. Try speaking to the estate's attorney about the loan. If you inherit any funds from the deceased person, you could apply them toward settling the auto loan.

If you're considering co-signing an auto loan for a relative or friend, think carefully about the consequences should that person die before the loan is paid off. If responsibility for the loan would cause you true financial hardship, it's probably better not to co-sign it. However, you can protect yourself by purchasing life insurance on the primary borrower. Ask your insurance agent about relatively inexpensive term life policies for the primary borrower. While the primary borrower might not like the idea, it does protect you in case the primary borrower dies.