Can You Be Removed as a Cosigner on a Car?
Understand the pathways and prerequisites for a cosigner to successfully exit their responsibility on a car loan.
A cosigner on a car loan is an individual equally responsible for the debt alongside the primary borrower. This arrangement helps the primary borrower qualify for the loan, especially with limited credit history or a lower credit score. While a cosigner provides security for the lender, removal from this obligation is possible, depending on the original loan agreement and the primary borrower’s financial standing.
Understanding Cosigner Removal Options
Removing a cosigner from a car loan often involves specific actions that change the terms of the original financing agreement. One common method is for the primary borrower to refinance the loan. This means obtaining a new loan solely in their name, which then pays off the existing loan that included the cosigner. If approved, the cosigner’s responsibility is extinguished as the original debt is satisfied.
Another direct approach is selling the vehicle. If the car is sold, the proceeds are used to pay off the outstanding loan balance. Once the loan is fully repaid, both the primary borrower and the cosigner are released from their financial obligations. Paying off the entire loan balance early also removes the cosigner, clearing the debt.
Some loan agreements may also include a specific cosigner release clause. This provision allows for the cosigner to be removed after the primary borrower has met certain conditions, such as making a specified number of on-time payments. Reviewing original loan documents or contacting the lender can confirm if this clause exists and its requirements entail. Not all loans offer this option.
Key Considerations for Cosigner Release
For a cosigner to be released from a car loan, several financial conditions and requirements typically need to be met by the primary borrower. The primary borrower’s creditworthiness is a significant factor, particularly for refinancing. Lenders assess their current credit score and credit history, often looking for scores in the 600s or higher to qualify for new financing. A strong credit profile demonstrates the primary borrower’s improved ability to manage debt independently.
The primary borrower’s income and debt-to-income (DTI) ratio are also evaluated. Lenders need assurance that the borrower has stable income sufficient to cover loan payments without the cosigner’s support. A lower DTI, typically below 36% to 49%, is preferred, indicating manageable debt relative to income. This financial stability is crucial for a lender to approve a new loan solely in the primary borrower’s name.
A consistent record of on-time payments on the current car loan is important. Lenders view a positive payment history as evidence of reliability and responsible financial behavior. This history can be a prerequisite for refinancing or exercising any cosigner release clauses.
The vehicle’s loan-to-value (LTV) ratio also impacts refinancing options. If the amount owed on the car is significantly higher than its current market value, it can complicate refinancing or selling the vehicle. An LTV below 100-125% is generally favorable for refinancing.
What It Means to Remain a Cosigner
When an individual remains a cosigner on a car loan, they retain significant financial and legal responsibilities. The cosigner is equally responsible for the loan payments if the primary borrower fails to make them. If the primary borrower defaults, the lender can pursue the cosigner for the full outstanding balance.
The loan also appears on the cosigner’s credit report. While consistent, on-time payments can potentially benefit the cosigner’s credit score, any missed or late payments, defaults, or repossessions will negatively impact both the primary borrower’s and the cosigner’s credit. This can affect the cosigner’s own borrowing capacity for future loans or credit products. In a default, the lender has the right to pursue the cosigner for the outstanding debt, which may include the deficiency balance after a vehicle repossession and sale. This can lead to collection efforts, legal action, or even wage garnishment against the cosigner.