I Cosigned for a Car Loan. How Do I Get Out?

Cosigning for a car loan helps a family member or friend secure financing, potentially offering better interest rates or loan approval. However, this support carries significant financial responsibility for the cosigner. This article explores methods to release yourself from a cosigned car loan.

Understanding Your Liability as a Cosigner

When you cosign a car loan, you enter into a legal agreement that makes you equally responsible for the entire debt, not just a portion. This is known as “joint and several liability,” meaning the lender can pursue you for the full loan amount if the primary borrower fails to make payments. You do not gain ownership rights to the vehicle, but you assume the same financial risk as the primary borrower.

The loan typically appears on your credit report from the start, and any late payments or defaults by the primary borrower will negatively impact your credit score. This can make it difficult for you to secure other loans or credit in the future. Conversely, consistent, on-time payments can positively influence your credit. Should the car be repossessed due to non-payment, you remain liable for any deficiency balance—the amount still owed after the vehicle is sold, plus associated fees. Lenders are generally not obligated to notify cosigners of missed payments before taking action.

Methods to Remove Your Name from the Loan

One common approach is for the primary borrower to refinance the loan. This involves the primary borrower applying for a new loan in their name only, with the proceeds used to pay off the existing cosigned loan. For this to be feasible, the primary borrower typically needs to demonstrate improved creditworthiness, sufficient income, and positive equity in the vehicle. The cosigner is only released from liability once the original loan is fully paid off by the new refinancing loan.

Another direct method involves selling the vehicle and using the sale proceeds to satisfy the outstanding loan balance. The sale price must be enough to cover the entire loan amount; if it falls short, the primary borrower, and potentially the cosigner, would need to cover the remaining difference. This process requires the primary borrower’s cooperation and involves transferring the vehicle’s title. Selling the car effectively eliminates the debt and, consequently, the cosigner’s obligation.

The most straightforward, though potentially costly, way to remove a cosigner is to pay off the loan in its entirety. This can be done by either the primary borrower or the cosigner. Once the full balance is remitted to the lender, the loan obligation ceases, and the cosigner’s liability is terminated. Some lenders might have specific policies for early repayment, and it is advisable to contact them for an exact payoff amount and to inquire about any potential prepayment penalties.

Actions When Direct Resolution is Challenging

If the straightforward methods of refinancing, selling, or paying off the loan prove challenging, especially due to an uncooperative primary borrower or financial hurdles, alternative actions become necessary. If the primary borrower is uncooperative, maintaining open and documented communication is advisable, perhaps through certified letters or emails, to express concerns and propose solutions. While lenders might offer options like forbearance or deferment, these typically require the primary borrower’s initiation and do not remove the cosigner’s liability. Voluntary repossession, where the primary borrower returns the car to the lender, is a last resort that negatively impacts both parties’ credit and still leaves both responsible for any deficiency balance after the sale.

Financial hurdles, such as the primary borrower’s poor credit preventing refinancing, require a different approach. The primary borrower can work to improve their credit score over time by consistently making payments on all their financial obligations and reducing overall debt. This can eventually enable them to qualify for refinancing independently. Seeking guidance from a financial advisor or credit counselor can also provide strategies for the primary borrower to enhance their financial standing.

For the cosigner, monitoring the loan’s status directly with the lender is important, regardless of the primary borrower’s cooperation. This allows the cosigner to track payments and the outstanding balance, providing early warning of potential issues. It is prudent for the cosigner to carefully document all communications with the primary borrower and the lender, any payments made, and all attempts to resolve the situation. This record can be important for future actions.