There will be times in our life when the cup is more half empty than full. One of those times is when you go apply for an auto loan and you are told no. You are told either your income is too low or not stable enough. Or maybe your credit score and history are on the losing side of what seems like a never-ending battle. You realize you don’t have the resources to qualify on your own, so you take the lenders advice and get a co-signer.
Essentially a cosigner will be a family member or friend with a higher credit score and a stronger credit history. In most cases, a much higher income as well. Having a cosigner that meets these requirements will not only help approve the auto loan but also get a lower interest rate and shorter loan term.
The cons of having a cosigner
A cosigner provides the lender with a peace of mind when approving the auto loan. To keep that peace of mind the lender will have the cosigner sign a Cosigner’s Notice. The notice provides the obligations that the cosigner will have, along with guarantee the auto loan is paid in full if the original borrower does not fulfill their obligation.
Now you have your new vehicle and decide you really do not like having a cosigner on your loan. Not only is there the stress of having a cosigner, but they are the ones building their credit, not you. If you want to build and strengthen your credit score and history, you will have to remove the cosigner from the auto loan. We are talking three friendly ways, there will be some work involved but no long battle or signing over your firstborn.
There are 3 ways to remove a cosigner from an auto loan
Option 1: the easiest way to remove a cosigner from an auto loan is to upgrade your vehicle
The first and usually the easiest way to remove a cosigner from an auto loan is to upgrade your vehicle. This will remove the cosigner from the auto loan, therefore, making you the sole borrower. After a year into the loan, you can go to the dealership and upgrade. This can be done as long as your credit and income have improved and you have met your loan obligations.
By upgrading your vehicle you will not only in most cases get a newer model, but the loan is also in your name and your credit building will be the one that benefits from the new agreement.
Option 2: is to see if there is a Cosigner Release Option
The second way to have a cosigner removed from your auto loan is to see if there is a Cosigner Release Option. There are banks and private lenders that will offer a release option for your auto loan. The Cosigner Release Option will include conditions that will remove the cosigner’s obligation from the loan. This is after a specified number of on-time payments are made by the primary borrower, which is usually at least one year into the loan.
Another option (and this one is the hardest and not the one I would put all my eggs in a basket for) is seeing if the lender will refinance your auto loan. After a year or more you can go to the lender and see if they will refinance the loan. By doing this, the loan will not only be in your name, but you may also get a lower interest rate. Most banks or private lenders do not like to refinance; they would rather have you upgrade or just keep the loan the way it is.
Option 3: is to pay off the auto loan sooner
The final option to remove a cosigner off your auto loan is to pay off the auto loan sooner. You can do this either by selling the vehicle or using other funds to cover the loan. Selling the vehicle will again require leg work and should be looked at as a last resort. You may not get a high enough offer to cover the whole auto loan and will still require further financing. Unless you have a money tree in the back yard or have the winning numbers to the lottery, you will need to be sure to get the book value of your vehicle as you will lose money on the sale.
Unfortunately, none of these options are a quarantine to remove your cosigner from an auto loan!
Before taking the plunge in getting an auto loan with a cosigner, look into your three options mentioned above. Make sure you understand fully the work that is required to do so. There are far too many other things in life that need worrying about. Don’t add your auto loan to the list. Your cosigner and yourself will need to be aware of all the obligations that come with your auto loan. And most importantly, how to remove your cosigner when the time comes.