How to remove a co-signer from a car loan

When your credit score is less than perfect, or you’re just starting to build a credit profile, having a co-signer can help you get a car loan. But if your circumstances change over time or your credit score improves and you would like to remove the co-signer from your loan, there are three primary options. You can refinance, get a co-signer release or pay off the loan.

Options for removing a co-signer from a car loan

Having a co-signer on an auto loan is a great way to get approved by lenders if your credit score is less than ideal because it gives your lender added assurance that you will pay off the loan. However, those with added financial responsibility alongside the main borrower may want to exit for various reasons.

Refinance

One way to remove a co-signer from your loan is to refinance. You’ll need to take out an entirely new loan, possibly with a different lender. When you do this, the old agreement is closed, and you start from scratch with a new loan that won’t be attached to the co-signer anymore.

Refinancing can also be an opportunity to lower the interest rate on your car loan or even the monthly payment by extending the loan term.

Keep in mind that in order to gain approval for a refinance you will need to have been making your monthly payments on time and have good to excellent credit.

Get a co-signer release

To get a co-signer release you will first need to contact your lender. After contacting them, you can request the release — if the lender offers it. This is just paperwork that removes the co-signer from the loan and places you, the primary borrower, as the sole borrower on the loan.

One of the drawbacks to this approach is that your initial loan term and interest rate may be impacted. This is especially true if your approval was dependent on your co-signer’s good credit. If the co-signer is released from the loan, your lender may adjust your current terms. You will also have to show a history of timely payments before the lender y agrees to release the co-signer. It’s also important to note that not all loans include a co-signer release option, so it’s wise to look into this prior to agreeing to a loan.

Pay off the loan

The most painless way to remove a co-signer is to pay off the car loan. If the removal is due to financial strain this may not be the most practical option but paying off the loan in full will rid the responsibility of both the primary borrower and the co-signer.

To do this, you will be expected to pay off the current loan balance along with the payoff amount. You will have to contact your lender for the specific repayment methods, especially if the pay-off timeline is earlier than initially agreed upon.

Reasons to remove a co-signer

There are a few reasons why you would remove a co-signer from your auto loan, such as:

• Relationship change. Perhaps, you had a spouse or significant other co-sign the loan. Over time, your relationship status changed, and now you want them off the loan.
• Improved credit. Your credit score improves as you make timely payments on your car loan. After a few years, it can reach the point where you’re around the same credit score as your co-signer, thus nullifying their reason for being on the loan. Remember that you’ll want to check with your lender beforehand to ensure you’ll receive the same interest rate as your current loan.
• Protecting their credit. If you experience financial hardship, you might miss a car payment. Missed payments show up on your credit history as well as your co-signers. That’s why it’s important to be proactive if this happens. That way it doesn’t impact their credit. Another reason to remove them is because the debt affects their credit score. Your auto loan impacts their debt-to-income ratio. Removing them from the loan can lower this ratio, making them a better candidate when they want to apply for credit.

Does removing a co-signer impact your credit score?

It depends on your credit history. If you’ve worked hard to improve your credit score to the point you can standalone on the loan and receive the same or a comparable interest rate, then the impact it will have is minimal. If you plan to refinance, you might experience a slight dip in your credit score due to the hard pull of your credit histories.

However, if you still have a lower credit score when trying to remove the co-signer, it might place you on the hook for a car loan with a higher interest rate. This won’t hurt your credit on its own, but with a higher interest rate, you’ll have larger monthly payments.

If your budget is tight, this could create a situation where you’re more likely to miss or be late on a payment. Therefore, make sure to take a thorough and honest look at your finances before deciding whether to remove the co-signer.

Next steps

The removal of a co-signer can be time-consuming, so it’s best to think before agreeing to a co-signed loan. And you should only go ahead with a removal in very specific circumstances.

If you decide to remove a co-signer, research your options carefully to determine which approach makes the most sense for you. If you’re considering refinancing your loan or obtaining a co-signer release, review your credit score and payment history to make sure your financial profile will allow you to qualify for a loan on your own.