How to Remove a Co-Borrower From an Auto Loan

A co-borrower on an auto loan shares equal financial responsibility for the debt and typically has shared ownership of the vehicle. This means both individuals’ names appear on the car’s title, and both are legally obligated to make payments. While a co-borrower can help strengthen a loan application by combining incomes and credit profiles, circumstances may arise where removing one becomes necessary. This process often involves assessing the remaining borrower’s financial standing to ensure they can independently manage the loan obligations.

Common Methods for Co-Borrower Release

The most frequent approach to remove a co-borrower from an auto loan involves refinancing the existing debt. Refinancing replaces the current loan with a new one, ideally solely in the name of the remaining borrower. This new loan pays off the original joint loan, thereby releasing the co-borrower from their financial obligation and shared ownership. The terms of the new loan, such as the interest rate and repayment period, may differ from the original agreement.

Another less common, but possible, method is a formal co-borrower release directly from the current lender. Some lenders may offer specific clauses in their loan agreements that allow for the removal of a co-borrower under certain conditions. This option typically requires the remaining borrower to meet specific criteria set by the lender, often including a review of their credit and income. If approved, the lender processes paperwork to update the loan agreement and title without issuing a completely new loan.

A straightforward, though not always feasible, way to achieve co-borrower removal is by completely paying off the auto loan. When the loan balance reaches zero, all parties are automatically released from their obligations. This can be done through a lump-sum payment or by accelerating regular payments until the debt is satisfied. Selling the vehicle and using the proceeds to clear the loan also effectively removes all borrowers from the financial responsibility.

Qualifying for Co-Borrower Release

Successfully removing a co-borrower from an auto loan largely depends on the remaining borrower’s ability to independently meet the lender’s financial requirements. A strong credit score and a positive credit history are fundamental, as lenders assess the risk of lending to a single individual. While minimums vary, a credit score of 600 or higher is generally sought for refinancing, with scores of 670 or more often leading to better terms. Lenders also review the payment history on the current auto loan and other debts, seeking consistent on-time payments.

The remaining borrower’s income and debt-to-income (DTI) ratio are important factors. Lenders need assurance that the individual has a stable income sufficient to cover the monthly loan payments and other financial obligations. The DTI ratio, calculated by dividing total monthly debt payments by gross monthly income, is a key metric. While some lenders may accept a DTI up to 50%, a ratio below 36% is generally considered favorable, indicating a lower risk.

The vehicle’s loan-to-value (LTV) ratio also plays a role, especially in refinancing scenarios. This ratio compares the outstanding loan balance to the vehicle’s current market value. A lower LTV, indicating the vehicle is worth more than the loan balance, is more appealing to lenders. Most lenders prefer an LTV below 125%, though some may approve loans with an LTV up to 130% depending on other qualifying factors.

To assess these qualifications, lenders typically require specific documentation from the remaining borrower. This commonly includes proof of income and verification of employment. Lenders also request proof of residence, identification, and details about the vehicle including its Vehicle Identification Number (VIN) and current registration. Information about the current auto loan, including the payoff amount, is also necessary for the process.

The Application and Approval Process

The first step involves contacting either the current auto loan lender or new potential lenders, especially if refinancing is the chosen method. Many financial institutions offer online applications, but submission can also occur over the phone or in person.

After the application and supporting documents are submitted, the lender initiates an underwriting process. Underwriting involves a thorough review of the borrower’s financial background, including their credit history, income stability, and the vehicle’s value. Underwriters verify the provided information and assess the risk associated with the loan. They may request additional documents or clarifications during this review period to ensure all criteria are met.

Upon successful underwriting, the lender will communicate their decision. If approved, the remaining borrower will proceed to the closing phase, which involves signing new loan documents. For refinancing, the new loan funds are then used to pay off the original auto loan. The vehicle’s title is subsequently updated to reflect the removal of the co-borrower’s name and the new lienholder, a process that can take several weeks depending on state motor vehicle department processing times.

Following the approval and closing, the former co-borrower should be formally notified that they have been released from the loan obligation. This change will also typically be reflected on both borrowers’ credit reports, showing the original loan as paid off. While the remaining borrower continues to build credit history with the new loan, the removed co-borrower benefits from a decreased debt-to-income ratio, which can positively impact their credit profile. However, it is worth noting that removing an account, even a paid-off one, can sometimes have a temporary, minor effect on credit scores.