If you buy a car with poor credit or no credit, you might have to use a cosigner to get a loan. A cosigner is a creditworthy individual who accepts legal and financial responsibility for the payments if you default on the loan. Basically, it's a person with good credit who trusts you and agrees to pay your debts if you can't pay them back.
While a cosigner can be an immense help in getting an auto loan, the shared loan can become a burden for both parties as time passes. If your cosigner wants to be free from the loan, or you want to cut ties with them, you can try to remove them. Here's what to know about removing a cosigner from a car loan.
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Can You Remove a Cosigner from a Car Loan?
It's possible to remove a cosigner from a car loan. It's not always easy, though. Lending companies appreciate having a cosigner on a loan because it gives them extra reassurance that someone will pay them back.
Removing your cosigner leaves just you to cover any late or missed monthly payments, so some lenders might make it difficult to remove the second person. Before you can remove a cosigner, you may have to prove that your finances and/or credit score have improved since getting the loan.
Reasons to Remove a Cosigner
You might want to remove a cosigner for a variety of reasons, including:
Changes in Your Relationship Status
Many people turn to their significant others to cosign loans. After a divorce or breakup, you might need to remove that person from your car loan. If a family member or friend signed on your loan with you and you no longer have a relationship with them, removing them as a cosigner might help you become financially independent.
Even if you're still close with the cosigner, sometimes removing them can help relieve undue strain from your personal relationship.
Credit Security
You might remove a cosigner to protect their credit or yours. If the primary payer on the loan is experiencing financial hardship, a missed loan payment can lower the cosigner's credit score. The debt from your auto loan also lives on your cosigner's credit report.
If they need to take on debt of their own, such as a personal loan or a mortgage, removing them from your loan might lower their debt-to-income ratio to help them qualify. Conversely, if your cosigner's credit is suffering, removing them from your loan could protect both of you financially.
Improvements in Credit
You might also decide to remove a cosigner because you simply no longer need them. For example, say you needed a parent to sign with you when you bought your car because you had no credit. In recent years, however, you've built up your credit and no longer need their support. If your credit is strong enough to support your car loan on your own, you may choose to remove the cosigner.
Four Ways to Remove a Cosigner from an Auto Loan
There are several ways to remove a cosigner from your auto loan. You might consider speaking to your cosigner or your lending company to determine which option is the most appropriate for your situation. Here are the four main ways to remove a cosigner:
1. Release the Cosigner
Some banks and lending companies offer cosigner releases. Essentially, you fill out paperwork that officially transfers the entire loan into the primary borrower's name. However, it's not an option with every lender.
While simply releasing the cosigner sounds like an easy option to you, most lenders don't want to do this. It puts them at risk, so they often make it challenging to request a cosigner release or decline requests altogether.
Some require the cosigner to make a particular number of minimum monthly payments before they can qualify for a release. Check your car loan paperwork to see if your contract mentions a cosigner release as a possibility.
If your lender allows cosigner releases, they might reserve them for qualified borrowers. That means the higher your credit score, the better your luck will be. Most financial institutions view primary borrowers with strong credit to be dependable, so they might be more comfortable letting these individuals handle their auto loans alone.
2. Pay Off the Loan
If you have the money to pay off your loan in full, you might consider this option to remove your cosigner. This might mean making a lump sum payment or making multiple monthly payments to get your balance to zero. Paying off your auto loan can also save you money in interest, reducing the overall cost of the loan. As soon as the loan is paid off, your cosigner is off the hook.
Paying off a car loan is costly, but it's the route that requires the least paperwork. If you have more money than time, it might be worth considering. Call your lender to discuss paying off your loan early, as different lenders have different policies for early repayment. Some might even charge you a fee.
3. Refinance Your Car
Refinancing is another way to get a cosigner off your car loan. Refinancing means scrapping your current loan and replacing it with a new one. Borrowers usually refinance to get a better deal than they could get when they first bought their car.
This might be a suitable option to pursue if you're in better financial standing than you were at the time of purchase. People with great repayment histories and impressive credit reports often have the most success applying for refinancing.
Other benefits of refinancing include:
- Smaller monthly payments: You might find a loan with more manageable monthly payments.
- Better interest rate: A new loan might have a more favorable interest rate, especially if you've raised your credit score.
- Different loan duration: You could switch to a shorter-term loan to avoid overpaying in interest or accruing negative equity.
- Opportunities for a new lender: If you'd rather work with a different bank or lending company, refinancing your car could be an opportunity to switch.
However, know that refinancing sometimes comes with costs. The lender might add fees, and you could end up overpaying by taking out a loan for more than the vehicle's value. Get quotes from a variety of lenders, and consider getting a formal appraisal on your car to ensure you don't opt into a bad deal.
4. Sell the Car
Are you already considering getting a new car? It could be time to sell it and get something new. Selling your car and using the money to pay off your loan gets you and your cosigner off the hook.
Plus, you can upgrade to a newer model or downgrade to a cheaper model according to your needs. Before you commit to this route, make sure you're not upside down on your loan, meaning you owe more than the car's worth.
Selling a car with negative equity could put you in the red, as you might have to pay out of pocket to cover the loan balance. If your car has positive equity, meaning you can sell it for more than you owe, you might even take home additional money. You can put that money toward your next car or save it.
Does Removing a Cosigner Impact Your Credit?
Removing your cosigner can affect your credit score, especially if you're not financially secure. It's important that you're able to continue making payments in full and on time by yourself. Removing a cosigner could improve the cosigner's credit, as it lowers their outstanding debt.
How Long Should You Wait Before Removing a Cosigner?
You can often remove a cosigner at any point during the loan period. Your loan paperwork might dictate specific terms, though. For example, some lenders require 24 months of on-time payments from the primary borrower before they'll consider releasing the cosigner.
It might also be wise to wait to remove your cosigner until you can prove your creditworthiness to your lender. Consider waiting until you have more credit history, a higher score, or more income.
Tips for Removing a Cosigner
Here are some tips for removing the cosigner on your auto loan:
Improve Your Financial Standing
Before trying to remove a cosigner, strengthen your credit score as much as possible. Lenders are often more flexible with borrowers they see as financially independent and responsible. Prioritize making prompt payments on all your accounts, reduce your balances, and look for opportunities to increase your income.
Make Timely Payments
In the meantime, it's vital that you continue making your car payments on time. This shows your lender you're dependable as the sole borrower, and it keeps your account in good standing. Plus, it reduces the overall balance on your account, which might help you when selling, refinancing, or paying off your balance.
Talk With Your Lender
Each lender has its own unique policies. If you're desperate to get a cosigner off your account, call your lender and ask about your options. They might work with you to come up with a solution.
Think Carefully Before Using Another Cosigner
A cosigned loan is a financial responsibility for both the primary borrower and the cosigner. It requires trust, and it has the potential to create tension in your personal relationships.
The next time you're taking out a new loan, think carefully before using a cosigner. Sometimes they're necessary, but if you can avoid them in the future, it might save you some trouble.
Elizabeth Rivelli is a freelance writer with more than three years of experience covering personal finance and insurance. She has extensive knowledge of various insurance lines, including car insurance and property insurance. Her byline has appeared in dozens of online finance publications, like The Balance, Investopedia, Reviews.com, Forbes, and Bankrate.
