Can You Get Out of a Loan You Cosigned?

Cosigning a loan involves a significant financial commitment, where an individual agrees to be responsible for another person’s debt. This arrangement typically occurs when the primary borrower may not independently qualify for the loan due to factors like insufficient credit history or income. By adding a cosigner, the lender gains additional assurance of repayment, thereby reducing their risk. The act of cosigning establishes a direct financial link between the cosigner and the loan, meaning the cosigner’s financial standing becomes directly tied to the performance of that debt. This article explores the nature of these obligations and potential avenues for a cosigner to be released from such a commitment.

Understanding Cosigner Obligations

When an individual cosigns a loan, they assume legal and financial responsibility for the entire debt. Lenders typically establish “joint and several liability,” meaning both the primary borrower and the cosigner are equally and fully responsible for repaying the loan. This arrangement allows the lender to pursue either party for the outstanding balance, regardless of who primarily benefits from the loan proceeds.

Cosigning directly impacts the cosigner’s credit report and score. Even if the primary borrower consistently makes all payments on time, the loan appears on the cosigner’s credit history. This can affect the cosigner’s debt-to-income ratio and their ability to qualify for new credit.

In the event of default, the lender has recourse against the cosigner. If the primary borrower fails to make payments, the lender can directly contact the cosigner to demand payment. The lender is not generally required to exhaust all collection efforts against the primary borrower before turning to the cosigner. This means the cosigner can face immediate financial demands and adverse credit reporting if the primary borrower misses even a single payment.

The cosigner’s credit score will suffer damage if the loan goes into default. Missed payments, charge-offs, or collections actions on a cosigned loan are reported on the cosigner’s credit history, just as they would be for their own direct debts. This negative impact can persist for several years, making it challenging for the cosigner to obtain new credit, secure favorable interest rates, or even rent property.

Exploring Pathways to Release

Obtaining a release from a cosigned loan can be complex, typically requiring lender approval and depending on the primary borrower’s financial standing. One common pathway involves the primary borrower refinancing the original loan into a new one solely in their name. This requires the primary borrower to apply for a new loan, using its funds to pay off the existing cosigned debt. For this to occur, the primary borrower must demonstrate improved creditworthiness, sufficient income, and a stable financial history.

Some loan agreements may contain a specific cosigner release clause, offering a predefined path for removal from the obligation. These clauses are not universal and are more common in student loans or certain mortgages. To determine if such a clause exists, the cosigner should review the original loan agreement. Common conditions for activation include a specific number of consecutive on-time payments by the primary borrower, or the primary borrower independently meeting the lender’s current credit and income criteria.

A less common route is loan assumption, where another qualified individual takes over the loan from the original primary borrower. This involves a new borrower applying to the original lender to assume the existing loan’s terms and remaining balance. If approved, the new borrower replaces the original primary borrower, releasing both the original primary borrower and the cosigner. The lender will review the new applicant’s credit history and financial capacity before granting approval.

The most straightforward method for a cosigner’s release is for the entire loan to be paid off. Once the principal and interest are settled, the loan account closes, and all parties, including the cosigner, are no longer obligated. This can be achieved by the primary borrower making all scheduled payments until maturity, or by making a lump-sum payment to satisfy the remaining balance early.

To discuss release options, the cosigner should contact the loan servicer or lender. Have the loan account number, primary borrower’s name, and contact information ready. The lender’s customer service or loan modification department can provide details on cosigner release, refinancing, or existing release clauses.

Managing Remaining Liability

If a cosigner cannot be released and the primary borrower faces financial challenges, managing the remaining liability requires proactive measures. The cosigner should regularly monitor the loan’s payment status, ideally with the primary borrower’s consent to access account information. Staying informed about on-time payments provides early warning of potential issues. Many lenders offer online portals where authorized parties can view payment history and current balances.

Should payment difficulties arise for the primary borrower, open communication with both the primary borrower and the lender is key. Discussing the situation with the primary borrower can help identify the root cause of issues and explore solutions. Contacting the lender promptly, even before a payment is missed, can allow for the exploration of hardship programs, temporary payment deferrals, or modified payment plans.

The consequences for a cosigner are severe if the loan ultimately defaults. The cosigner becomes legally responsible for all missed payments, late fees, and the outstanding principal balance. The lender will typically pursue the cosigner for these amounts, which can include demanding full payment or initiating collection activities. These efforts can escalate to legal action, where the lender may obtain a judgment against the cosigner to garnish wages, levy bank accounts, or place liens on property.

Beyond immediate financial demands, a loan default will damage the cosigner’s credit rating. Every missed payment and subsequent collection action is reported to major credit bureaus, leading to a drop in the cosigner’s credit score. This negative information can remain on credit reports for up to seven years, making it difficult to secure new loans, credit cards, or housing.