How to Get Out of a Cosigned Car Loan

A cosigned car loan involves a contractual agreement where a second individual, the cosigner, pledges to take on financial responsibility for the debt if the primary borrower cannot make payments. This arrangement often helps the primary borrower secure financing, especially with limited credit history or a lower credit score, by adding the cosigner’s stronger financial standing. The cosigner’s creditworthiness can lead to loan approval or more favorable terms, such as a lower interest rate. Cosigning places the cosigner in a legally binding position, making them equally accountable for the loan’s repayment. If payments are missed, the cosigner’s credit can be negatively affected, and they could be pursued for the outstanding balance.

Methods to Remove a Cosigner

Several methods exist for a cosigner to be released from a car loan. The most common approach involves the primary borrower refinancing the existing loan. This process entails securing a new loan solely in the primary borrower’s name, which then pays off the original cosigned loan, thereby releasing the cosigner from their responsibility. Refinancing replaces the old debt with new debt, under terms the primary borrower qualifies for independently.

Another pathway to remove a cosigner is through the sale of the vehicle. If the car is sold, the proceeds are used to pay off the outstanding loan balance. This action extinguishes the debt, removing both the primary borrower and the cosigner from any further obligations related to that specific loan.

A direct method is for the primary borrower to pay off the loan in full. This might involve a lump sum payment or consistent accelerated payments until the balance reaches zero. Once the entire loan amount is satisfied, the loan contract is closed, and the cosigner’s obligation ends.

Some lenders offer specific cosigner release programs, though these are generally rare and come with certain conditions. These programs allow the primary borrower to request the removal of the cosigner from the existing loan without refinancing or paying it off. Eligibility often depends on the primary borrower demonstrating a consistent history of on-time payments and meeting specific credit and income criteria set by the lender. The lender typically assesses the primary borrower’s ability to manage the loan independently before approving such a release.

Process for Cosigner Release

Implementing a cosigner release strategy requires specific steps from the primary borrower.

Refinancing the Loan

If the primary borrower intends to refinance the loan, preparatory actions involve gathering necessary financial documents, such as recent pay stubs and current loan statements, to demonstrate sufficient income and financial stability. It is also advisable for the primary borrower to check their credit score and report beforehand.

The primary borrower should apply for refinancing with multiple lenders to compare interest rates and terms. Lenders will assess the primary borrower’s income, debt-to-income ratio, and credit history to determine eligibility for a new loan without a cosigner. If approved, the new loan funds will be disbursed to pay off the original cosigned loan, effectively removing the cosigner’s name from the obligation.

Selling the Vehicle

Should selling the vehicle be the chosen path, the primary borrower must first obtain a current valuation of the car from reliable sources. Simultaneously, they should request a payoff quote from the current lender, which specifies the exact amount needed to satisfy the loan. This step is crucial to determine if the sale proceeds will cover the outstanding balance.

After valuation, the primary borrower can list the car for sale. Upon securing a buyer, the loan must be fully paid off with the sale proceeds before the title can be transferred to the new owner. If the sale price is less than the payoff amount, the primary borrower is responsible for covering the remaining difference to clear the loan.

Paying Off the Loan in Full

For situations where paying off the loan in full is feasible, the primary borrower needs to contact the current lender to request a precise payoff amount, which includes the principal balance and any accrued interest. The lender will provide a payoff quote, valid for a certain period.

With the payoff quote in hand, the primary borrower can then make the final payment to the lender. Once the full amount is received, the lender will process the loan closure and send the vehicle title, free of any liens, to the primary borrower, thereby releasing the cosigner.

Cosigner Release Programs

If a lender-specific cosigner release program is available, the primary borrower should directly contact the original lender to inquire about the program’s eligibility criteria and application process. These programs often require a certain number of consecutive on-time payments and a review of the primary borrower’s updated credit profile and income. The primary borrower must submit any required paperwork and documentation to the lender, who will then review the request and notify them of the approval or denial.

Ongoing Obligations if Release is Not Possible

When a cosigner cannot be released from a car loan, their legal obligations and financial implications persist for the loan term. The cosigner remains equally responsible for all payments if the primary borrower fails to make them. The lender can pursue the cosigner directly for missed payments, late fees, or the entire outstanding balance if the primary borrower defaults. The cosigner is effectively a guarantor of the debt.

The loan’s activity, whether positive or negative, will continue to be reported on the cosigner’s credit report. Consistent, on-time payments by the primary borrower can positively influence the cosigner’s credit score, contributing to a healthy payment history. Conversely, any missed or late payments, or a full default by the primary borrower, will negatively impact the cosigner’s credit score, potentially making it harder for them to secure new credit or loans in the future.

A cosigned car loan also impacts the cosigner’s debt-to-income (DTI) ratio, even if they are not making the monthly payments. The loan balance is considered part of the cosigner’s overall debt, which can affect their ability to qualify for other lines of credit, such as a mortgage or another car loan. Lenders assess DTI to gauge a borrower’s capacity to take on additional debt, and a high DTI can signal increased risk.

Furthermore, a cosigner typically has no ownership rights to the vehicle itself, even though they are financially liable for the loan. This means the cosigner cannot use the vehicle as collateral for other loans or sell it without the primary borrower’s cooperation. The cosigner’s responsibility is purely financial, without the benefits of asset ownership.