Removing a Co-signer from a Loan: Options & Implications

If you have a poor or limited credit history, having a co-signer is essential to getting a car loan or a student loan. When you use a co-signer, you effectively assume their credit history for the purpose of getting approved for a loan. The downside is that if you don't successfully pay off the loan, both you and your co-signer suffer. Though you can't replace one co-signer for another, you can eliminate the co-signer from the loan agreement, leaving you as the only person responsible for paying back the loan.

Step 1

Go to annualcreditreport.com and obtain a copy of your credit report. Identify any inaccuracies and dispute them with the credit bureaus. When your disputes are complete, go to creditkarma.com and get your free credit score. This will show you how credit-worthy you are as an individual, which is important as you attempt to remove your co-signer.

Step 2

Contact your bank and inquire about refinancing your current loan. This means you'll close out your old loan and take out a new loan for the same amount as your current balance, with you as the sole person on the loan. Check out other banks if your bank doesn't allow you to refinance.

Step 3

Apply for a new loan under your own name. The credit score you obtained will largely dictate whether you'll be accepted, giving you an idea of what you can expect from the approval process. You might not receive the same interest rate you had with a co-signer; there's also a chance you might not be approved at all. If you feel your bank isn't giving you the rate you deserve, try applying at other banks to get the best rate.

Tip

Some student loans don't require refinancing to remove a co-signer. Instead, the lender will simply remove the co-signer if you ask and if your credit is satisfactory.

Set up automatic payments to come out of your checking account every time you get paid. This will help you to build a solid credit history.

Warning

Some types of loans cannot be refinanced. These include loans on older used cars that are generally not worth the amount of money left on the loan.