I Cosigned a Loan. How Do I Get Out?

A cosigned loan involves a primary borrower and a cosigner, with the cosigner agreeing to be responsible for the debt if the primary borrower fails to make payments. The cosigner is equally liable for the loan, and the debt appears on their credit report. Cosigning can help someone with limited credit history or lower income qualify for a loan or better terms, but it also places a significant financial commitment on the cosigner.

Preparing for Cosigner Release

Before attempting to remove your name from a cosigned loan, gather information and assess the financial standing of all parties. Obtain the original loan agreement, including terms, current balance, and interest rate.

Evaluate the primary borrower’s financial health, including their payment history on the cosigned loan, income stability, and credit score. A strong payment history and improved financial standing for the primary borrower enhance the chances of a successful cosigner release.

Check your own credit report and score. Cosigned loans appear on your credit report, and timely payments positively impact your score, while missed payments can damage it. Contact the lender to inquire about their cosigner release policies without making a formal request. This helps identify if an option exists and what criteria apply.

Pathways to Cosigner Release

Several methods exist for a cosigner to be released from a loan, depending on the loan type and the primary borrower’s financial circumstances.

Refinancing the Loan

The primary borrower can refinance the loan in their name alone. This requires the primary borrower to have a good credit score, such as a minimum of 620 for conventional mortgages or between 670 and 739 for student loans, and a stable income to qualify independently.

Cosigner Release Clause

Some loan agreements, particularly for student or auto loans, include a specific cosigner release clause. This allows for the cosigner’s removal after conditions are met, such as a specified number of consecutive on-time payments (often 12 to 48 months). The primary borrower must demonstrate an improved credit profile and sufficient income to assume full responsibility.

Selling the Secured Asset

If the loan is secured by an asset like a car or home, selling the asset can eliminate the cosigner’s liability. The sale proceeds are used to pay off the outstanding loan balance, releasing all parties. This is considered when the primary borrower can no longer afford payments or the asset’s value exceeds the remaining debt.

Paying Off the Loan

The primary borrower can pay off the loan entirely. This immediately removes the cosigner’s responsibility. Fully satisfying the debt, whether through accelerated payments or a lump sum, achieves cosigner release.

Executing a Cosigner Release

Once a pathway for cosigner release is identified, formally execute the release.

For Refinancing

The primary borrower undergoes a loan application process. This includes submitting financial documentation like W-2 forms, tax returns, pay stubs, and bank statements. Lenders review employment history, income, and conduct credit checks to assess the primary borrower’s ability to qualify independently.

For Cosigner Release Clause

The primary borrower must formally request release from the original lender. This involves completing specific forms and supplying updated financial information to demonstrate improved creditworthiness and income. Lenders review payment history to ensure all conditions, such as required on-time payments, have been met.

For Selling a Secured Asset

Coordination between the primary borrower and cosigner is important. Ensure the asset is sold for a price sufficient to cover the outstanding loan balance. Upon sale, the loan is paid off directly from the proceeds, and lienholders are paid first to release their claims, allowing for clear title transfer.

Follow up with the lender throughout the process. Once the release is approved or the loan is paid off, obtain written confirmation from the lender stating the cosigner has been fully released from all obligations. This documentation serves as legal proof of release.

Managing Your Ongoing Cosigner Status

If immediate cosigner release is not feasible, manage your ongoing cosigner status to mitigate risks.

Monitor Payments

Regularly monitor the primary borrower’s loan payments. This can be done by requesting monthly statements from the lender or by checking your own credit report, as missed payments will appear there. Prompt identification of payment issues allows for quicker intervention.

Maintain Communication

Maintain open communication with the primary borrower about the loan status. Consistent dialogue helps address potential payment difficulties before they escalate into serious delinquencies. This proactive approach supports the loan’s good standing and protects your financial interests.

Understand Default Implications

Understand the implications if the primary borrower defaults. As a cosigner, you are legally responsible for the entire debt, and the lender can pursue you for repayment without first attempting to collect from the primary borrower. A default can severely damage your credit score, potentially remaining on your credit report for up to seven years, and may make it challenging to obtain future credit.

Explore Alternatives

If the primary borrower faces financial difficulty and release is not an option, explore alternatives. This might include making payments yourself to prevent default, if financially feasible, to protect your credit. Collaborate with the primary borrower to re-evaluate their financial situation and consider hardship options with the lender, such as temporary payment reductions.