How to Remove a Cosigner From a Car Loan
Guide to releasing a car loan cosigner. Understand the paths to sole responsibility, what you need, and how to execute the change.
A car loan cosigner assumes equal responsibility for the debt alongside the primary borrower. This arrangement is often necessary when the primary borrower’s credit history or financial standing does not independently meet a lender’s approval criteria. As financial situations evolve, a borrower may seek to remove a cosigner from their car loan. This desire frequently arises from improved personal credit, a change in relationship with the cosigner, or the cosigner’s need to reduce their debt-to-income ratio for their own financial endeavors. Removing a cosigner can offer both parties greater financial independence and flexibility.
Methods for Cosigner Removal
There are several established methods for removing a cosigner from a car loan, each addressing the shared financial obligation. One common approach involves refinancing the loan. This process entails securing a new loan solely in the primary borrower’s name, which then pays off the original loan, thereby releasing the cosigner.
Another method is the outright sale of the vehicle. When the car is sold, the proceeds are used to pay off the existing loan. This action extinguishes the original loan agreement, releasing both the primary borrower and the cosigner from their financial responsibilities.
A straightforward way to remove a cosigner is by paying off the loan balance in full. If the primary borrower has the financial means to satisfy the remaining principal balance before the loan’s scheduled term ends, the loan is closed, and the cosigner is no longer liable.
Some loan agreements include a specific provision known as a cosigner release clause. This clause allows for the cosigner’s removal after certain predefined conditions are met, such as making a specified number of consecutive on-time payments. Reviewing the original loan documents is necessary to determine its availability.
Evaluating Borrower Eligibility
Lenders assess several factors when a borrower seeks to assume sole responsibility for a car loan. A strong credit score is a primary consideration, as it indicates a borrower’s historical financial reliability. A FICO score of 670 or higher is considered good, and scores above 700 or 740 often lead to more favorable loan offers. An improved credit score since the original loan can significantly enhance a borrower’s eligibility for a solo loan or cosigner release.
Consistent, on-time payment history on the current car loan is another important factor. Lenders typically require a track record of responsible payments, sometimes specifying 12 to 24 consecutive on-time payments, especially for a cosigner release clause. This demonstrates the borrower’s capacity to manage the financial obligation independently. Payment history constitutes a significant portion of a credit score, underscoring its importance.
Sufficient and stable income, alongside a manageable debt-to-income (DTI) ratio, are also crucial. Lenders generally prefer a DTI ratio of 43% or lower, though some may approve loans with a DTI up to 50%, including the estimated car payment. This ratio is calculated by dividing total monthly debt payments by gross monthly income.
The age and remaining term of the current loan can also influence eligibility. Some lenders might prefer a period of established payment history, such as 6 to 12 months, before approving a refinance or cosigner release.
Executing the Cosigner Release
To execute a cosigner release through refinancing, the primary borrower applies for a new loan with various financial institutions. This application typically requires documentation such as proof of identity, income verification (e.g., pay stubs or tax returns), and details about the current loan and vehicle, including the Vehicle Identification Number (VIN) and current mileage. Upon approval of the new loan, its funds are used to pay off the existing car loan, removing the cosigner.
When selling the vehicle to remove a cosigner, determine the car’s market value through resources like online valuation tools. Contact the current lender to obtain a “10-day payoff” amount, the sum required to fully satisfy the loan within a short timeframe, accounting for accruing interest and any potential fees. If selling privately, the buyer’s payment goes directly to the lender to cover the outstanding balance. Dealerships can streamline this process, handling the payoff and title transfer as part of a trade-in or direct sale.
Paying off the loan directly requires contacting the current lender to request an official payoff quote. This quote provides the precise amount needed to close the loan, including principal and any accrued interest up to a specific date. Borrowers can then submit this final payment through various methods, such as electronic transfer, cashier’s check, or bank wire. Confirm with the lender that the loan account is fully closed and the cosigner’s obligation is terminated after the payment clears.
For a cosigner release clause, contact the current loan servicer to inquire about the specific terms and conditions. These include a requirement for a set number of consecutive on-time payments (typically 12 to 24 months) and a review of the primary borrower’s current income and creditworthiness. The lender will require a formal application and an updated credit check to verify the primary borrower can independently manage the remaining loan obligation.