How to Get Off a Cosigned Car Loan

A cosigned car loan involves two parties: the primary borrower, who uses the vehicle, and the cosigner, who guarantees the loan. As a cosigner, you agree to be equally responsible for the debt if the primary borrower fails to make payments. This arrangement helps the primary borrower secure financing, often at more favorable terms, especially if they have limited or poor credit history. Removing yourself from a cosigned loan reduces personal financial liability and improves your debt-to-income ratio for future credit applications.

Refinancing the Car Loan

Refinancing the car loan is a common and effective method for a cosigner to be released from their obligation. This process involves the primary borrower taking out a new loan solely in their name, which then pays off the original cosigned loan. This shifts full financial responsibility to the primary borrower.

Preparatory Information

For the primary borrower to refinance, they must demonstrate financial stability and creditworthiness. A strong credit score is required, often a FICO score of 670 or higher, with scores above 700 securing the most favorable interest rates. Lenders also evaluate the primary borrower’s income to ensure they can manage new monthly payments, often requiring proof of employment such as pay stubs or tax returns. A favorable debt-to-income (DTI) ratio is also important; lenders often prefer a DTI below 50%, with below 36% considered very good.

Procedural Steps

The primary borrower begins by researching various lenders, including banks, credit unions, and online providers, to compare interest rates and terms. After selecting potential lenders, they submit loan applications along with required documentation such as a driver’s license, proof of insurance, vehicle information (VIN, make, model, mileage), and current loan details. Once an application is approved, the new loan funds pay off the existing cosigned loan directly. This transaction effectively removes the cosigner from the financial obligation, as the old loan is settled and a new one is established solely under the primary borrower’s name.

Selling the Vehicle to Pay Off the Loan

Selling the vehicle is another way to eliminate a cosigned car loan, especially if refinancing is not feasible. This method ensures the loan is paid off by liquidating the asset.

Preparatory Information

Before selling, determine the car’s current market value using reputable online valuation tools such as Kelley Blue Book or Edmunds. Obtain the precise payoff amount from the current lender, which includes the principal balance, accrued interest, and any applicable fees, and is valid for 10 to 20 days. Negative equity occurs when the outstanding loan balance exceeds the car’s market value; in this situation, the seller would need to pay the difference out of pocket to fully satisfy the loan.

Procedural Steps

Selling a car with an outstanding loan involves finding a buyer, often through a private sale to maximize the selling price. The lender holds the vehicle’s title until the loan is fully repaid. Proceeds from the buyer must be directed to the lender to cover the payoff amount. Once the lender receives the full payoff, they release the lien on the title, which can then be transferred to the new owner, thereby releasing the cosigner from their obligation.

Paying Off the Loan Directly

Directly paying off the loan balance in full is the most straightforward way to remove a cosigner, though it requires immediate access to the necessary funds. This method completely extinguishes the debt.

Preparatory Information

To pursue this option, obtain the precise payoff amount from the loan servicer. This amount includes the principal balance, any per diem interest, and any other outstanding fees. The payoff quote is valid for 10 to 20 days.

Procedural Steps

Once the exact payoff amount is known, the full payment can be made to the lender, often via a certified check, wire transfer, or through the lender’s online payment portal. After payment, confirm with the lender that the loan has been paid in full and the cosigner is officially released. Lenders provide official documentation, such as a lien release or a loan satisfaction letter, confirming all obligations have been met.

Navigating Challenges and Next Steps

Cosigners may face challenges if the primary borrower is uncooperative or unable to fulfill their obligations. Actions can be taken to protect financial standing. After successful removal from a loan, verifying the change on credit reports is an important final step.

Actions for Uncooperative Borrowers

If the primary borrower is unwilling or unable to cooperate, maintain open communication, in writing, about the loan status. Understand the terms of the original loan agreement, as this outlines responsibilities and consequences of default. Monitor loan payments to ensure they are made on time, as missed payments can negatively impact both the primary borrower’s and the cosigner’s credit scores. Lenders can pursue the cosigner for missed payments.

Post-Removal Verification

After being removed from a cosigned loan, check your credit report to confirm the loan no longer appears as a joint obligation. This update may take 30 to 60 days to reflect across all three major credit bureaus: Equifax, Experian, and TransUnion. If the loan still appears incorrectly, dispute the inaccuracy with the credit reporting agency and the information provider.