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“Two years later, the car had mechanical problems and the relative quit paying for it.” (Photo subject is a model.) - Getty Images/iStockphoto Dear Quentin, My friend cosigned a loan for a relative to buy a car. The relative had gone through a rough time due to a divorce and needed transportation. Rather than buy a budget car, he bought a 20-year-old BMW with 160,000 miles on it from a dealer, paying too much. It’s my understanding that the defaulter put down $2,000 and my friend cosigned for him to borrow the rest. A 20-year-old Series 3 BMW isn’t exactly a high-value car.
Two years later, the car had mechanical problems and the relative quit paying for it. The balance owed is $5,000. The water pump went out, and the owner may have caused further damage by driving the car hot. The loan company called my friend to inform him the loan was in default. I got involved because I’m into older cars, so I towed it from the shop where it was sitting to my friend’s house. He asked me if I could help him replace the water pump.
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I don’t know a thing about BMWs, and I really don’t want to learn. I told him the best thing to do is to pay off the loan so he doesn’t damage his credit and sell the car for whatever he can get for it. The driver thinks he should be compensated $1,500 for the tires he’s still paying for; before the car developed issues, he bought a new set of tires (on a credit card). He is now demanding payment. I don’t think my friend owes him anything.
Since the car was run hot, even if a new water pump is installed, further damage may have been done. What can be done?
The Friend
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The answer to your question, of course, is to tell this borrower of other people’s money and defaulter of auto loans to get on his bike and start cycling. - MarketWatch illustration Dear Friend, It’s the end of the road for this car and, possibly, this friendship.
Talk to the lender about a cash settlement, and aim to sell the car on eBay EBAY or Facebook Marketplace META, or arrange for the lender to repossess the vehicle. A 20-year-old BMW with 160,000 miles with an engine that has overheated is likely going to soak up more money, with no return.
Cosigning the auto loan was a big risk considering your carbuyer’s recent financial and personal woes. Nor was it the fact that the driver of the car then defaulted on that loan. All of that could have been predicted from Day 1. It’s unfortunate that the driver of this BMW, the person who accepted such largesse from his relative, wants to be paid $1,500 from a friend who kindly cosigned his loan.
Story ContinuesThe harsh reality is when your friend cosigned this loan, he agreed to step in if the borrower could not or would not pay. The lender does not care about the backseat drama, it only wants to be made whole. Your friend cosigned the loan; his relative paid for new tires. They both have lessons to learn about financial and legal boundaries, and that their actions have consequences.
In the meantime, your friend should check whether the car is even worth fixing and find out more about the repossession process. Allowing the lender to repossess the vehicle is one option. It may be that your friend can negotiate a settlement with the lender.
However, your friend’s relative and your friend, as a cosigner, may also be held legally responsible for the default. In many states the lender can still obtain a “deficiency judgment” against both borrower and cosigner after they sell the car at auction. Your friend could easily end up owing $3,000-$4,000 even after a repo.
Put bluntly: (1.) When your friend cosigned the loan, he agreed to be responsible for the payments if the primary borrower is unable or unwilling to make them. (2.) The car has mechanical problems and may have been damaged by overheating, but this may be just the beginning of the issues. And (3.) The tires are a red herring; they form part of the car’s current value, and do not consist of a separate asset that can (or should) be reimbursed independently.
I suggest your friend talk to his relative (rather than email or text). Tell him: “You chose to buy new tires for your car, and that was an investment you made and as a cosigner on your loan, I am not responsible for this cost. The loan is now in default. That was your responsibility. As a result, I want to protect my credit and resolve this as painlessly as possible. This is frustrating for both of us. That said, we now need to talk about surrendering the car to the lender.”
A harsher critic might argue that your friend’s relative could have chosen a cheaper car, and bought a vehicle within his budget — without asking a friend to cosign his loan. Your friend has learned a valuable lesson about putting his own credit rating on the line by cosigning a loan. Favors like this rarely end well. He needs to resolve this situation as soon as possible, so he can move on with his life.
After your friend has sold the car, he has some soul-searching to do. He was a willing participant in this affair. Why did he say yes to this request to be a cosigner? If he can put the answers to those questions into practice, this will be a small price to pay for a lesson in balancing generosity and a willingness to help a friend or relative with the harsher realities of life.
Related: I met a friend for lunch. When the check arrived, she said, ‘Thank you so much for paying!’ Was I taken for a fool?
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Previous columns by Quentin Fottrell:
‘We have no prenuptial agreement’: Will my wife be able to take my money if I transfer it to my retirement account?
How do I let go of the resentment I feel towards my wealthy, unhelpful brother?
My daughter has $500K in med-school expenses. Can my wife and I afford to pay it off?
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