There are many reasons you might want to get out of a cosigned loan. Maybe you want to protect your credit score or qualify for more credit. Or it could be that your relationship with the primary borrower has gone south and you’re concerned you’ll end up saddled with their debt if they can’t make their payments.
How to remove yourself as a cosigner on a loan
There is no set procedure for getting out of being a cosigner. This is because your request to remove yourself will need to be approved by the lender (or you’ll need to convince the primary borrower to take you off or adjust the loan). That being said, you do have options for removing yourself as a cosigner from a loan or mortgage.
What the cosigner can do
Ask to be removed. Contact the lender and ask if they can remove you from the loan. Some lenders will allow cosigners to be removed if the primary borrower has a strong enough credit score (or a high enough income) to support the loan on their own.
Get a cosigner release. Some loans will release your obligation as cosigner after the borrower makes a certain number of consecutive on-time payments. You should read through your loan documents or contact your lender to find out if this kind of loophole exists in your situation.
Refinance. Get the borrower to refinance the loan in their name only. The refinanced loan will replace the loan you cosigned for and get you off the hook while also potentially benefiting the primary borrower by giving them lower interest rates or more favourable terms. This will only work if the primary borrower’s credit is strong enough to refinance on their own without needing another cosigner.
Sell the asset and pay off the balance. If your name is on the title for a secured loan like a car loan and the primary borrower isn’t able to make their payments, you can discuss the option of selling the asset to pay off the loan and close the account. This may be more of a final resort if you can’t remove yourself as a cosigner and the primary borrower can’t make their payments.
Seek legal advice. You may benefit from contacting a lawyer to discuss your options if you can’t see another way out of the loan. They may be able to defend your interests in court, or help you out with alternative arrangements.
What the primary borrower can do
Consolidate the debt. The primary borrower can decide to combine all of their outstanding debts into one easy payment with a new loan. This will give them better rates and terms, and your name will be removed from the debt when they consolidate.
Refinance their loan. Similar to debt consolidation, get the loan refinanced in the primary borrower’s name, meaning the primary borrower applies for a new loan to cover the amount remaining on the current loan (where you’re the cosigner). Do not include yourself as cosigner in the new loan.
Sell the financed asset. If the debt you cosigned for is secured by an asset (like a vehicle or home), the primary borrower can sell off that asset to make their payments. Hopefully the asset is worth as much as the remaining debt to cover the full balance.
Find another cosigner. It may be possible for the primary borrower to find someone else willing to cosign the loan for them. In this case, they’ll need to take out a new loan with the new cosigner and you can be removed when they transition.
What if I can’t remove myself as cosigner?
If you can’t find a way out of the loan you cosigned for, you may need to pay off the balance. This is because late or missed payments on the loan (even if it isn’t yours) can bring down your credit score.
If your score falls below 650, which it’s likely to do if you miss multiple payments, it can make it much more difficult to qualify for loans in the future. You’ll also find the terms for bad credit loans will be much less favorable, with higher interest rates and stricter repayment terms.
When you cosign a loan, you attach your name to the loan in order to “guarantee” the payments of another borrower (usually a loved one). When you cosign, the loan is considered “your debt” even though it belongs to someone else and they’re responsible for repayment.
This means you’re on the hook if the primary borrower is unable to repay their debt. Your credit score will also go down if they default or miss payments, which can affect your ability to borrow in the future.
Having a cosigner can help borrowers strengthen their loan application, get lower interest rates and access credit they wouldn’t be able to get otherwise. There are relatively few benefits for cosigners, other than helping their loved ones get better terms for their loan.
How can I prepare for the worst when I cosign for a loan?
Before you cosign for a loan, you should make sure you have a backup plan in case the primary borrower defaults or misses payments.
Make a clear budget. Sit down with your loved one and go through their income and expenses to make sure they have the money available to make payments.
Sign a written agreement. See about signing a legal contract with the borrower so you have some backup if they default on their loan.
Fill out a cosigner release form. Find out if your lender offers a release to cosigners and what protection you might be entitled to.
Take out loan insurance. Ask the borrower to take out loan insurance so you know you’re covered if they lose their job, get injured or die.
Monitor loan payments. Keep in touch with your loved one to get regular updates on the status of the loan. If they’re struggling to make payments, work with them to come up with a solution before they default.
Work to improve the borrower’s credit. Find ways to help the primary borrower improve their credit score so they can eventually take the loan over on their own.
Will my credit score be affected by cosigning a loan?
Your credit score can be affected both positively and negatively by cosigning a loan. If the primary borrower is responsible and makes on-time payments, you’ll reap the benefits with a boost to your credit score.
But if the primary borrower fails to pay back their loan or misses payments regularly, it can bring your credit score down. If this continues, it can sometimes make more sense to pay off the debt yourself to keep your credit score intact.
Concerned about the impact to your credit? There are a few ways to rebuild your credit.
1. Credit builder loans
With a credit builder loan, you make regular payments to a lender to build your credit and then receive a lump sum of the money at the very end.
2. Credit repair services
If you’re looking for assistance on how to rebuild your credit, you can turn to a credit building service.
Bottom line
It can be difficult to remove yourself as a cosigner on a loan but there are a few options you can explore to protect yourself and get back on track with your own finances. If your last resort is to pay off the debt yourself to close the account, learn more about personal loans here.
Frequently asked questions
No, you don’t need to cosign a loan and should think carefully about doing so. You may be asked to help a loved one who has very little credit history or a low credit score get access to credit by “lending” your good credit to their loan. This helps them get approved, but also puts your credit score on the line if they don’t make repayments.
Cosigning on someone else’s loan is by nature a high-risk (and low-reward) activity. It depends on your own financial situation and relationship to the primary borrower. If you don’t know them well or they can’t qualify because they have bad credit, you might have reason for concern.
Cosigners act as a bit of a safety net for lenders. Most will be unwilling to let you off the hook because you bring down the level of risk associated with the loan. That’s because your lender can come to you for repayment if the primary borrower defaults.
The short answer is yes. You will have to pay off any debts you cosigned for even when the primary borrower files for bankruptcy. In fact, the lender may come after you straight away claiming the entire loan is due and payable immediately.
Claire Horwood is a writer at Finder, specializing in credit cards, loans and other financial products. She has a Bachelor of Arts in Gender Studies from the University of Victoria, and an Associate’s Degree in Science from Camosun College. Much of Claire’s coursework has focused on writing and statistics, with a healthy dose of social and cultural analysis mixed in for good measure. In her spare time, Claire enjoys rock climbing, travelling and drinking inordinate amounts of coffee.
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