There are three ways to remove a co-signer from a car loan—check your loan contract for a release option and then contact your lender; refinance the loan with only one borrower’s name on it; or pay the loan off in its entirety, freeing all parties from the loan’s financial obligations.
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Keep reading about how to remove a co-signer from a car loan (while sipping your lemonade, of course).
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Why get a co-signer on a car loan?
If your credit isn’t great, or you aren’t sure you can make monthly loan payments, a co-signer eases the financial burden. The co-signer is responsible for covering the amount owed in the loan’s terms if the principal borrower cannot make a payment.
With a co-signer, both the principal borrower and the co-signer are incentivized to make sure the loan’s terms are met—if one party defaults, this will impact the credit rating of both the main borrower and co-signer
Key Takeaway: If either the main borrower or a co-signer defaults on a loan payment, the credit scores of both parties will be negatively affected.
Why remove a co-signer from a car loan?
Circumstances change, and sometimes a co-signer needs to be removed from a car loan. It can be done, but this can be a complicated process. Here are the most common reasons why a co-signer is removed from a car loan.
Domestic changes
Divorce and separation are common reasons for removing a co-signer from a car loan. Such events usually mean dividing up assets or divesting yourself of assets from your soon-to-be-ex—including homes, financial assets, and of course, cars.
If the separating parties have signed onto a car loan together but one person wants the car, the other party may want to remove themselves from the loan.
One person may be experiencing financial difficulties and be unable to afford to be a co-signer after separation (or they may not want to). This also would mitigate the worry about a former partner defaulting on the loan, affecting both signatories’ credit scores.
Financial stress
Any number of reasons can cause personal financial stress, including the loss of a job, dealing with a failing business, lawsuits and legal fees, and more—all of these situations can spur the removal of a co-signer from a car loan.
If a principal borrower is worried about a co-signer’s ability to meet loan payments (if need be), this can be grounds for getting them removed from the loan. Conversely, a co-signer with financial issues might remove themselves from a car loan’s obligations to protect both their own credit score and the main borrower’s score.
Credit problems
A worsening credit score due to late payments on other bills and debts also can be a reason to remove a co-signer from a car loan. In cases where a co-signer is needed, lenders want a co-signer with good credit who they can trust to make loan payments in case the principal borrower is unable to do so.
MORE: The best car insurance for bad credit drivers
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How to remove a co-signer from a loan
While it can get complicated, you can remove a co-signer from a car loan in three ways—invoke the loan contract’s release option (if there is one), refinance the loan, or pay the loan off entirely.
Looking For A Release Option In Loan Contract
Some car loan contracts—but not all—have release options in them that allow a co-signer to negotiate an exit from the contract.
If you need to remove a co-signer from a car loan, go over the loan contract with a fine-toothed comb and see if there is a release option in it—if there is one, talk to your lender about it.
There may be specific conditions that must be met for a release option to be exercised, such as:
A certain number of loan payments must have already been made
The principal borrower will remain on the loan
The credit scores of the remaining loan signatory remain above a certain level
Remember, not all loans have out clauses—ask about release options before you sign the car loan.
Refinance The Loan
By refinancing a co-signed car loan
with only the principal borrower’s name on it, you will remove the co-signer by taking their name off the new loan. If you need to take the co-signer off the loan, or your financial situation has improved and you are confident you can handle the loan on your own, refinancing (hopefully for a lower interest rate and better loan terms) could be an option.
Here are two ways to refinance to remove a co-signer from your car loan:
Take out a new loan for the current loan’s remaining balance with the same lender
Transfer the loan’s remaining balance to a new loan with a new lender (if your original lender refuses to refinance)
If you qualify and are approved for a new, refinanced loan, sign it yourself and the co-signer from the previous loan will no longer have any obligations on your refinanced loan.
Key Takeaway: If your credit improves, you can refinance the loan without a co-signer, but only if you’re confident you can make the payments.
Pay The Loan Off
A fool-proof way to remove a co-signer from a car loan is to pay the loan off entirely.
As long as your financial situation allows it, paying off your car loan fulfills the obligations to your lender. In that case, both the principal borrower and co-signer will be freed of the car loan.
Make sure to check with your lender to see if there are any pre-payment penalties before you pay off the loan in its entirety.
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