How to Remove a Cosigner From a Car Loan
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Summary:
You have several choices if you want to remove a cosigner from an auto loan. You can apply for a cosigner release, refinance the auto loan, or pay off the car loan entirely. Alternatively, you could sell the vehicle and use the money from the sale to pay off the loan balance.
Sometimes, particularly when you’re just starting out in life, you need a little help. For example, buying a car is an important step because it gives you the freedom to move about the world, work where you want, and otherwise live your life independently. But unfortunately, car loans require specific credit score and income requirements that a young person (or others with some financial strain) may not have achieved yet.
In that case, a parent, partner, or friend may step in and agree to cosign a car loan so that the individual can get approval for the loan. It’s a big obligation for both parties, and there may come a time when one or both individuals wish to remove the cosigner from the contract.
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What exactly is a cosigner
A cosigner, very simply, is a person who takes financial responsibility for a car loan, mortgage, or line of credit. They guarantee that the loan will be paid back, by them, in the event that the primary borrower stops making on-time payments for any reason.
For example, the borrower may have lost their job or is otherwise under financial strain. It could also be because the car owner is irresponsible or, worst case scenario, has died. Obviously, in the case of death, the borrower is not at fault for failing to pay, but the cosigner is still responsible for making the monthly payments.
It’s important to note that the cosigner has no legal claim to the car — the borrower alone holds the car’s title. A further snag could be if the deceased left the car to someone else in their will. Even though the vehicle has a new owner, the cosigner is still responsible for the loan payment.
Pro Tip
Whether you’re the primary borrower or a cosigner, carefully think over this decision and do your research before signing on the dotted line. It can be a difficult situation to extricate yourself from should the desire or need arise.
Fortunately, you can compare car loan terms before you become a cosigner, such as the auto loans below.
Why would you need a cosigner on a car loan?
Most of the time if someone needs a cosigner, it’s under very specific circumstances. That usually means the borrower is not eligible for loan approval all by themselves. Car loans can be difficult to get because they usually require good or excellent credit and proof of income showing that you are capable of making the monthly car payment.
Why remove a cosigner from an auto loan?
In many cases, a borrower may want to remove a cosigner from a car loan simply because their credit score has improved drastically over the years and/or they now make enough money to feel comfortable taking on full responsibility for the loan. In this case, an individual may just want to release their friend, partner, or family member from the burden of duty for the car loan.
Other circumstances can be a little trickier, such as in the event of a divorce, break-up, or some other issue with whoever it is who agreed to take on financial responsibility for the loan. This can be further complicated if the cosigner doesn’t wish to be taken off the loan.
However, for the sake of argument, let’s say the other party has agreed to be removed (as they will sometimes need to agree to be taken off the auto loan). At this point, you might be wondering exactly how to remove a cosigner from a car loan. Well, you have a few options to sift through.
1. Pay off the loan
Paying off the car loan in its entirety would be the easiest solution for all parties concerned. If the loan is dissolved, there’s no monthly payment to worry about and the cosigner is by default released from all responsibility.
The problem with this scenario is it’s not necessarily feasible for many consumers. Maybe you don’t have $10,000 (or whatever the payoff amount) laying around to settle the loan. One other option is to sell the car and use the proceeds to pay off the loan. It settles the primary objective but leaves one person without a car. Let’s call that a last resort and explore other possibilities.
2. Get a cosigner release
If your lender allows a release, which some lenders don’t (something to look into before you get into this predicament), you can apply for a cosigner release. You’ll need to contact the lender and request to have the other party removed from the loan, making you the sole borrower. You will both need to fill out and sign some paperwork and the lender will need to approve the request for the transition.
As mentioned, some lenders may not even allow this, but even if they do, it’s possible some of the loan terms and the interest rate may change. For example, if you got into this situation because of a less-than-ideal credit score, you may not be eligible for as competitive rates as you had been getting.
Also, keep in mind that if the lender does allow for a release, it may be contingent upon a history, or a certain number, of on-time payments.
Pro Tip
Before you get someone to cosign your car loan, make sure the lender has an option in the contract to release cosigners (which will likely come with certain stipulations). Then you can work on improving your credit score, with the goal of eventually releasing your cosigner from the financial responsibility for your loan.
3. Refinance the loan
If the other options are not financially feasible or permitted, you may want to consider refinancing your auto loan. Talk to your current lender first, as it may be possible to refinance the original auto loan, which would likely be a simpler transaction.
If you’ve had the loan for a while and have a good payment history with the lender, they may be willing to refinance even if your credit still isn’t great. (Although, at this point, your credit score should have improved by at least a few points.) Depending on how far along you are with the car loan (and if your income and credit rating have increased), you might even be able to refinance at a similar interest rate.
Alternatively, if you’re not able to refinance the original loan, you might have to get a new loan with an entirely new lender. If you carefully comparison-shop with online lenders, you might even be able to qualify for a lower interest rate. Furthermore, you could possibly negotiate different loan terms that allow for smaller monthly payments, making the loan even more affordable for you, which also translates to less risk for the lender.
FAQs
What happens if the cosigner dies?
Obviously, this is an unfortunate situation, but it can happen. Technically, a lender could require you to pay the loan in full, or they may restructure the loan terms and interest rate to reflect your personal finances.
However, the lender would only do this if you notify them that your cosigner has died. As long as you continue to meet the terms of your contract — always paying on time, which is most important to lenders — the lender really doesn’t need to know about these sad circumstances.
If the original borrower dies, as mentioned before, the person who cosigns is still obligated to repay the loan even after the death of the car owner. If the vehicle was bequeathed to someone else, you would need to discuss restructuring the payback terms with them.
What is the difference between a co-borrower and a cosigner?
A co-borrower actually owns a part of the asset, such as a car, and is just as responsible as the other party for repaying the auto loan. A cosigner, on the other hand, does not own any piece of the vehicle but is responsible for covering the loan if the primary borrower cannot make the payments for any reason.
Can a cosigner take their name off a car loan?
If you find yourself reconsidering your decision to act as a cosigner on someone’s auto loan, you have the same basic options to remove your name as does the primary borrower.
The problem is, since you aren’t one of the primary borrowers, you can’t just decide to back off from the financial obligation that you signed up for. You can ask the borrower to pay off the loan, request a cosigner release, or get a new loan, but you can’t legally remove your name without an agreement from the primary borrower because you’ve already signed a contract.
Does removing a cosigner affect your credit score?
The mere act of taking a cosigner off of the car loan will not have any effect on your credit history, adverse or otherwise. As long as you continue to make timely payments, your credit score can only improve.
The only problem would be if you take the cosigner off the loan and are late or miss payments. That will hurt your credit score tremendously and make it difficult to get auto loans or any other kind of loan in the future.
Key Takeaways
- Many people need the assistance of a cosigner, as approval for auto loans can be tricky for some individuals due to credit score and income requirements.
- A cosigner agrees to take full financial responsibility for the debt in the event that the primary borrower is unable to make the loan payments.
- Under certain circumstances, the primary borrower may eventually wish to remove a cosigner from the auto loan.
- There are three main ways borrowers can remove a cosigner: pay off the loan, apply for a cosigner release, or refinance the loan.
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