What You Need to Know to Get a Cosigner Off Your Car Loan
February 11, 2019 | By June Mckaig
Cosigning is a one-sided partnership—sort of an oxymoron, huh? It makes more sense when put into perspective, so let’s look at it this way: you have decided to take out a loan for a car, but you don’t have the credit score or income to support that loan.
That’s when the dealership will likely require a cosigner to back you up. Even though you will responsible for making payments on the loan, the dealership will put the spotlight on your cosigner in the event that you do not, and they must pay or suffer the credit fallout, just like you.
See what I mean? A cosigner is like your chaperone in the world of borrowing money. But what if you no longer want or need that supervision? Whether it's a divorce, a child becoming independent from his or her parents, or a friend wanting to no longer rely on another friend—removing a cosigner from your car loan can get tricky. Let’s got over a few tips that could make this process a whole lot easier.
1. Cosigner Release
Let’s try the straightforward approach first. Some dealerships or lenders allow for a cosigner to be released. Once a number of payments have been made on time by the borrower, ask the lender if they would allow for the cosigner to be released from the contract—you can also check any loan documents you have to read the fine print concerning the matter.
The borrower will need to demonstrate proof of good credit and the ability to repay the loan, meaning a recent paystub to show income. This will likely be the cleanest, quickest way to remove your cosigner; however, frequently this might not be an available option.
The borrower probably needed a cosigner in the first place because of a lack of credit, so while you may have made the appropriate payments thus far and have income, you still might not be attractive enough in the eyes of the lender, which leads us to the next option.
Refinancing can be a useful tool, especially involving building and saving credit. The same can be said for removing a cosigner from the equation of your loan. This option would involve quite a bit of research into alternate loans, including their term of length, APR, and borrowable amount.
You will want a new loan that covers the expense of the old one, and with a reasonable interest rate that you can manage yourself. If you are able to find one that satisfies this, then you can pay off your car loan from the dealer, thereby removing the cosigner from the responsibility of paying it and focus on the new loan on your own.
One of the biggest hiccups in this option is this: you presumably needed a cosigner on the initial loan because you didn’t have the required credit and income in the first place. If this is the case and you haven’t yet jumped into a better credit range, then you will probably have a very difficult time finding a new lender with more favorable terms. If this is the case, you will need to work on improving your credit score before attempting this option, which will take time.
Use a Credit Card to Refinance
If you are able to open up a new credit card that has 0% APR for the first year, then this might be an even better option than refinancing with a new loan. If you have access to a credit card with no interest, then you will most certainly save money in the long run as opposed to making payments with interest on a loan.
However, if you have calculated your expenses and find you will not be able to pay off the credit debt over the interest-free months, then you might wind up paying even bigger interest rates than before. Once your newbie credit card’s 0% APR period has expired, the interest on it will be likely larger than that of a loan. It’s important to consider this and balance transfer fees when considering using a credit card to refinance.
3. Cut Your Losses and Sell
If you want to remove your cosigner from your loan, a last ditch effort you can also pursue is to sell the asset. If you are able to sell the car and make enough money to pay off the loan, you can take whatever financial loss that came prior to that in order to end the whole ordeal.
A good thing to keep in mind if you consider this option is your state’s requirements for transferring the ownership of a car to another party. Delaware’s DMV requirements involve a rather long list you will need to check off, so take a look at that before you do any of the selling. Please also remember you will likely make more from selling your car if you actually know the value of it, and you might make more if you sell it on your own, as opposed to trading it in or through another dealership or used car shop.
Know that, if you are unfortunately going through the grueling trials of a divorce, and if there isn’t a more amicable way of dealing with a car on loan, you can also consider a Petition for Judicial Sale in lieu of Partition if your ex is on the title of the car. However, it might not be a bad idea to seek advice from a lawyer before doing anything beyond speaking with your soon-to-be ex-spouse.
Cosigners and Signers: It Goes Both Ways
Whether you’re the one trying to go independent from your cosigner with your car loan, or you’re the cosigner who no longer wants to be responsible for a loan, these tips help both parties in the event you need to drop a cosigner from a car loan.
Before doing anything, however, the best option would be to speak with each person involved before coming to a decision. That way there is no confusion during the process.
Don’t be afraid to ask the lender questions if you are confused with any of the terms on your loan, make sure you and your cosigner (or borrower) are on the same page, and always make certain you have a copy of the agreement on hand.