How to Remove a Cosigner from an Auto Loan

You will need to modify your loan terms in order to remove a cosigner from an auto loan. There are two primary methods to doing this: modifying the loan with your current lender and taking on a new loan altogether. If you take on a new loan, you will use it to pay off your existing loan. Both of these options have advantages and disadvantages.

Modifying with Your Lender

  • Disadvantages: Most lenders will not make this process easy on you. They agreed to your loan contract based on the terms you offered in your original application, which included a cosigner. Changing your terms will require the lender to change their terms as well, and they will want to assure they are making money and not losing money in the switch. This means lenders will often bump up your credit score or lengthen your loan in order to modify it, even if your credit history is good.
  • Advantages: Modifying the loan with your existing lender will typically result in the lowest impact to your credit score. When you modify, your lender reports the behavior to the credit bureaus, and your score will drop. However, if you modify with the lender's approval, perhaps increasing the sum the lender will make on the loan, they will be less likely to report this as a negative act against your credit.

New Lender

  • Disadvantages: When you go to a new lender in order to take a modification loan, you will have to deal with penalties from your existing lender. As discussed above, one penalty is a drop in your credit score. Further, the lender will typically charge you a prepayment fee on the loan. A prepayment fee was part of your initial contract, especially if you singed directly with your auto dealer. Auto dealers tend to have higher prepayment fees than banks. In any case, you will have to take a new loan that is actually for a higher amount than you would owe by paying off the original loan according to the contract. This may be a small difference in some cases; in orders, it will end up costing you thousands of dollars more in order to refinance through a new lender. If you do refinance through a new lender, you should note you will have to report this to your insurance company and possibly modify your insurance contract.
  • Advantages: It will be easier for you to source the loan from a new lender than to enter modification talks with your existing lender for the most part. You are also much more likely to get a competitive interest rate from a new lender than from your current lender if you have a good credit score. The new lender is not concerned with taking a loss on the existing loan. Instead, they will be totally focused on the potential profit to be made on the new loan.

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