Co-signers provide a great solution if your lack of income or credit history precludes you from qualifying for an auto loan. If your circumstances improve, you'll find that it's easier to add a co-signer than to remove one from a loan. Typically, removal involves a refinance of the loan, although some lenders may allow you to do a modification.
While banks typically sell mortgages, car loans are usually kept in-house. This means any modification agreements involve just two parties -- the lender and the borrower. Technically, a bank can modify a loan to remove a co-signer. While specifics vary from state to state, this usually involves the borrower and lender signing an amendment to the original loan. Lenders are more likely to play ball if your loan is in good standing. If you're struggling to make payments even with a co-signer, the chances of a modification are virtually nonexistent. If you become able to handle the debt without a co-signer to fall back on, the bank still might require you to simply refinance the loan.
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When you refinance an auto loan, you have to prove that you have the capacity and character to handle the debt. If your income has increased since you obtained the existing loan, you might be able to refinance without the co-signer. Banks measure capacity by calculating your debt-to-income ratio. This ratio compares your gross income with your fixed expenses, such as mortgages and car loans. In lending circles, character assessments are based on your credit history. If you handle your finances carefully, your credit score rises; late payments cause it to drop. You can potentially drop the co-signer if your credit score is high enough to satisfy your lender.
Value of Collateral
You can only drop your co-signer and refinance your car if the car holds enough value to warrant a new loan. Your car is only of value to your lender if its sale would raise enough cash to pay off your loan in case you default. Refinancing can prove problematic on an older vehicle or one with high mileage. To get around this potential problem, you could pay down the balance or refinance with a short-term loan. However, the latter option only works if you have enough income to cover the higher payments. If you originally got a co-signer because of your limited income, a short-term loan with high payments might not work.
Respect Your Co-signer
You and your co-signer both assume responsibility for repaying your loan. Late payments hurt your credit score and your co-signer's. After a refinance, your co-signer should check his credit report to make sure the loan has been removed as an obligation. It can take a month or so for a lender to notify the credit bureaus, so allow enough time for the change to be made. If the loan continues to appear on the co-signer's report, both of you should contact the lender immediately to establish the status of the loan.
- Minority Business Development Agency: 5 C’s of Credit Analysis
- Bankrate: Top Five Situations for an Auto Refinance
- Forbes: Getting Your Name off a Cosigned Loan
- Bankrate: How Do I Get Out of a Co-Signed Loan?
- Seattle Times: Co-Signer Will Find It Tough to Remove Name From Loan
- Federal Trade Commission: Co-Signing a Loan