Can I Get Out of a Cosigned Car Loan?

Cosigning on a car loan is a financial commitment, often undertaken to assist a friend or family member in securing financing. Circumstances can change, leading a cosigner to explore options for release from this obligation. Understanding the commitment and available pathways can help navigate such situations. The process of removing oneself from a cosigned car loan involves specific financial and legal considerations.

Understanding Cosigner Liability

When an individual cosigns a car loan, they assume a direct and equal legal responsibility for the debt. The cosigner is equally obligated to repay the entire loan amount if the primary borrower is unable to do so.

The loan account and its payment history appear on both the primary borrower’s and the cosigner’s credit reports. This shared responsibility extends to the loan balance, including any associated fees or collection costs. Unlike a co-borrower, a cosigner does not have ownership rights to the vehicle itself, nor is their name on the car’s title.

Paths to Cosigner Release

Several strategies exist for a cosigner to be removed from a car loan, though the feasibility of each depends on various factors, including the primary borrower’s financial standing and the lender’s policies.

Refinancing

Refinancing the loan is a common approach to remove a cosigner. The primary borrower applies for a new loan solely in their name, using the proceeds to pay off the existing cosigned loan. For this to be successful, the primary borrower needs to demonstrate improved creditworthiness, a stable income, and a positive payment history on the current loan.

Selling the Vehicle

Selling the vehicle provides another pathway to cosigner release. If the car is sold, the proceeds from the sale can be used to pay off the outstanding loan balance. This action terminates the loan obligation for both the primary borrower and the cosigner. Considerations include the car’s market value compared to the loan balance, as a shortfall would require the primary borrower to cover the difference. While a cosigner does not have ownership, their signature may still be required for the sale if they are listed on the title, which is rare for a cosigner, or if the lender requires it to authorize the payoff.

Paying Off the Loan Early

Paying off the loan early is the most straightforward method to release a cosigner. If the primary borrower can repay the outstanding balance, the loan is closed, and the cosigner’s obligation ends. This can involve a lump-sum payment or accelerated payments over time. Some loan agreements may include prepayment penalties, though these are less common for car loans and are typically disclosed in the loan documents.

Loan Assumption

Loan assumption, though less common for car loans compared to other types of debt, can occasionally offer a solution. This process involves a new individual formally taking over the existing loan obligations from the primary borrower. The new borrower must apply with the current lender and undergo a credit check to ensure they meet the lender’s qualifications. If approved, the original primary borrower and cosigner are released from the loan.

Cosigner Release Option

Some lenders offer a specific cosigner release option within the original loan agreement. This provision allows for the cosigner’s removal after the primary borrower has made a specified number of on-time payments, typically 12 to 24 months. The primary borrower’s credit score and payment history are reviewed to confirm their ability to manage the loan independently. It is important to check the original loan paperwork or contact the lender directly to determine if this option is available.

Direct Negotiation

Direct negotiation with the lender for cosigner release is generally difficult for car loans but can be considered. This approach usually requires the primary borrower to demonstrate significantly improved financial stability or credit standing. Lenders are often hesitant to release a cosigner without a formal refinancing or a substantial change in the primary borrower’s risk profile, as the cosigner provides an additional layer of security.

Implications of Remaining on a Cosigned Loan

Remaining on a cosigned car loan carries financial and credit risks for the cosigner, if the primary borrower encounters payment difficulties. The actions of the primary borrower impact the cosigner’s financial standing and credit profile.

The loan’s payment activity is reflected on the cosigner’s credit report. While timely payments can positively influence the cosigner’s credit score, late or missed payments by the primary borrower will negatively affect it. This adverse impact can lower the cosigner’s credit score, potentially making it harder to obtain new credit or loans in the future.

In the event of the primary borrower’s default, the cosigner becomes directly and fully liable for the outstanding debt. The lender can pursue the cosigner for payments without first attempting to collect from the primary borrower. This includes the loan balance, as well as accumulated late fees, collection costs, or legal expenses.

If the primary borrower defaults and the vehicle is repossessed, the cosigner remains responsible for any deficiency balance. A deficiency balance is the difference between the amount owed on the loan and the amount the lender receives from selling the repossessed vehicle, plus repossession and sale costs. Lenders can pursue legal action against the cosigner to collect this remaining balance, potentially leading to wage garnishment or bank account freezes depending on state laws.