Did you co-sign a car loan for a friend, boyfriend, girlfriend or family member? Do you regret co-signing the auto loan for them? Maybe you didn’t realize what exactly was involved or you’re no longer dating the person. For whatever reason, a lot of people who co-sign a car loan want to be removed from the loan at some point in time.
When you co-signed the auto loan, you essentially became the joint applicant on the loan. Since their credit wasn’t good enough, the lender considered both of your incomes and credit scores to approve the car loan. Not only is the payment history reflected on both of your credit reports, but if your friend or relative misses a payment, you are responsible to make the payment.
Another impact of co-signing a car loan for someone is that it will hurt your chances of getting approved for a mortgage or auto loan for yourself, Investopedia reports. Until that auto loan you co-signed for is paid off, it will count toward your credit usage ratio, which lenders look at when you apply for any type of credit, even credit cards. If the co-signed car loan increases your debt-to-income ratio or the percent of credit you owe versus your available limits, this will hurt you if you apply for credit.
If you want to buy a house or a car in the near future or no longer want to be on the co-signed auto loan, how do you get your name off? Investopedia suggests that refinancing the car loan is the best way.
After your friend or relative has made on-time payments for about six months to a year on the vehicle, have them apply to refinance the auto loan in their name. Once part of the auto loan has been repaid and the balance lowered, the total lower loan amount will be easier for them to get approved for without a co-signer. They will have to apply with their bank, credit union or other lender to refinance the loan. When the new loan is in their name only, you’ll be off the current loan and freed from the situation.
Other benefits of refinancing the car loan in your friend or relative’s name is that they might be able to lower their interest rate, which will save them money every month. Plus, they’ll benefit from making the payments themselves by increasing their credit score and auto loan specific credit score.
You’ll benefit because if they miss a payment, you’re not responsible anymore. Also, you’ll lower your total amount of debt you owe by not being on their car loan anymore, which will help you get the best interest rates on mortgages and auto loans.
Keep in mind that your friend or relative still has to qualify for the refinanced loan through a new lender, so if they’re paying their mortgage and credit cards late, there’s a slim chance they’ll get approved for the refinance auto loan. But with even a brief on-time payment history on the current car loan, your friend or relative should be able to qualify for the new, refinanced auto loan in their name.