Being a co-signer on an auto loan (or any loan, for that matter) is a big decision. It’s a service that can feel very rewarding, which is why co-signers are typically trusted friends or family. But it also comes with financial risk.
If the principal borrower experiences money troubles – a job loss, a drop in income or large, surprise expenses – and struggles to make their monthly payments, it can strain a once peaceful relationship and leave a co-signer on the hook to pay back a loan they helped the borrower get.
If you applied for your car loan with a co-signer and you want to remove their name from the loan or you’re a co-signer who wants your name removed from a car loan, here’s what you both need to know.
Who is Responsible for Removing a Co-Signer From an Auto Loan?
Getting out of a co-signer relationship is the duty of the primary borrower. Only the primary borrower can make any changes to the loan agreement.
However, a few conditions must be met:
- A co-signer release clause must be included in the loan agreement.
- Both the borrower and the lender must consent to co-signer removal.
- The borrower must prove they can afford to repay the loan without a co-signer.
When Should You Remove a Co-Signer From an Auto Loan?
You should remove a co-signer from an auto loan when it makes sense for you financially. Maybe your credit has improved and your income has increased, and you’re confident you can handle the loan on your own.
Or your co-signer wants to take out a loan, but your car loan debt increased their debt-to-income (DTI) ratio and is making it hard for them to qualify for a loan or better loan terms. Or you may just want to reduce their financial risk because they helped you when you needed them.
If you want to future-proof your relationship with a trusted friend or family member, removing them from the loan before you run into any financial troubles can be a smart move.
Common reasons why borrowers remove co-signers from their auto loan:
- Divorce or breakup with co-signer
- Anticipated death of the primary borrower
- Payment default by the primary borrower
- Regret by the co-signer
- Privacy concerns for the borrower
- Credit reporting of the borrower on the co-signer’s credit reports
- Financial reasons of both the borrower and cosigner
How To Remove a Co-Signer From a Car Loan
Selling the car or paying off the existing loan is the easiest way to remove a co-signer from a loan. However, there are a few options to explore when considering removing a co-signer from a car loan.
Request a release
You can use a co-signer release form to get a co-signer off your auto loan. But before you can exercise the release option, you’ll need to:
- Check your loan’s terms: See if your loan agreement allows the co-signer to be removed from the loan.
- Find out what the waiting period is: Some lenders require borrowers to wait 6 – 24 months before they can request a co-signer release application.
- Confirm your financial readiness: Before they release a co-signer, a lender will check if your financial circumstances have improved. That means reviewing your credit scores, come, DTI and credit reports.
- Confirm your lender’s co-signer release process: You may be required to submit a letter verifying your salary and copies of your last few pay stubs with the release form. In some cases, the lender may remove their name from the loan – but that’s pretty rare.
As the borrower, once your credit scores have improved, you can remove a co-signer by refinancing the car loan.
Pro-tip: It’s typically best to wait a year or more before refinancing an auto loan.
To refinance your car loan, you can apply with:
- The same lender: You can use the same lender you got your car loan with to refinance the loan in your name only. Some lenders will initiate a refinance once they’ve received a co-signer release request.
- A credit union: Credit unions may have special auto loan programs associated with your employer. They may also offer auto refi promotions for existing and new members.
- Any financial institution that offers auto loans: Many auto insurance companies partner with financial institutions. Check with your auto insurance company. They may offer an auto refinance promotion.
Once you’re approved for a refinance, the lender will pay off the existing loan and retitle the vehicle under your name, removing your co-signer from the previous loan.
Pay the loan off
Paying off the loan is the easiest way to remove a co-signer. Either the borrower or the borrower and co-signer can pay off the auto loan. Before you pay off the loan, make sure you review your auto loan agreement for any restrictions on early payoff.
The lender can pursue the co-signer’s estate if a borrower defaults. To remove the co-signer, you can pay off the loan, sell, trade in or refinance the car.
Consider selling your car
If you no longer want the car or can’t pursue the above options, you can sell it to remove the co-signer from the auto loan.
If the car is sold and the remaining loan balance is paid in full, the co-signer is off the car loan (and you no longer have a monthly car note to worry about). But, if the car is sold and there is still a balance on the car loan, both you and the co-signer will be responsible for loan payments until the loan is paid off.
How Does Removing a Co-Signer Affect Your Credit?
You may see a small dip in both the borrower’s and the co-signer’s credit scores after removing a co-signer from an auto loan.
If you remove a co-signer by:
- Paying the loan off: The debt will be recorded as paid in full on both the borrower’s and the co-signer’s credit reports, which does not hurt your credit, but can cause a small dip in your credit scores. The co-signer and borrower will also see a change in their debt-to-income (DTI) ratio.
- Selling the car: The debt will be recorded as paid in full on both credit reports, assuming the car sold for the remaining loan balance. Less debt can improve both the borrower’s and the co-signer’s credit scores and DTI.
- Refinancing: The debt will show as paid-in-full on the co-signer’s credit report. The co-signer will no longer be connected to the loan’s payment history.
Driving Alone and Exiting The Vehicle Loan Alone
Think of the co-signer on an auto loan as the trusted friend you’ve got riding shotgun. The last thing you want to do on a road trip is irritate the person in charge of the aux cord.
Make sure your co-signer understands the potential risk they are taking by helping you get approved for a car loan (or better car loan terms). If you’re being asked to co-sign an auto loan, make sure you’re prepared to pay off the car loan in case the driver – err, borrower – defaults.
If the ride gets too bumpy for either of you, there are several options available to pull over, drop a co-signer (off) and allow them to continue traveling on their merry way.