Can You Remove a Co-signer's Name From a Car Loan?

When you take out a car loan, the lender approves the loan based upon the creditworthiness of both the applicant and the co-signer. The loan contract amounts to an agreement between both you and the co-signer to pay back the car loan proceeds. Generally, you cannot remove a co-signer from a loan unless you actually pay off the loan and replace it with a new loan that does not involve a co-signer.

Underwriting

People with poor credit or limited income often have to involve a co-signer in a car loan application in order to gain approval. If you have good credit but insufficient verifiable income to make the monthly payments, the lender cannot approve your application unless you include a co-signer who has sufficient income to pay the debt. Loans are based upon your ability to qualify for the loan at inception, and the lender does not check whether your income or credit improves or deteriorates after the loan takes effect. Therefore, you cannot remove a co-signer from the loan simply because your income increased and you wish to make payments yourself.

Refinancing

You can refinance a car loan to remove a co-signer if your have sufficient equity in the vehicle to qualify for a refinance. Lenders classify cars as depreciating collateral because cars lose value with age and eventually become obsolete. Very often, the value of a car decreases more quickly than the balance on a car loan. Generally, you can only refinance a car loan if the loan amount does not exceed the car's value. If you owe more than the car costs at the time you plan to refinance, you must pay cash to settle the difference; otherwise, you cannot refinance.

Ownership

Some lenders do not allow co-signers without an ownership stake to sign on loans secured by a piece of collateral such as a car. Consequently, many people who use car loans to purchase vehicles have to add the co-signer not just to the loan but also to the title of the vehicle. When this occurs, in order to refinance the loan into your own name, you must first transfer the title from joint ownership to sole ownership, and you cannot do that until you payoff the existing lien.

Considerations

Most people want to remove co-signers from car loans after they have established credit. However, credit scores involve many different factors and having a good enough score to qualify for a loan by yourself and having a credit score good enough to qualify for a loan with a low rate are two different things. If you used a co-signer who had a very high credit score on a loan, the rate on the loan reflected the co-signer's score. If you refinance the loan and have a good but much lower credit score, you may end up with a significantly higher rate.