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Can You Get a Cosigner Off a Loan?

Christy Bieber, The Motley Fool

Is it possible to get a cosigner released from responsibility for a loan? Read this to find out.

Stack of bills labeled “Past Due” and “Account Closed”

Image source: Getty Images

Cosigning a loan is a really risky thing to do. Cosigners agree to accept shared legal responsibility for paying back a loan someone else has taken out. Typically, lenders only require cosigners when the primary borrower can’t qualify because of bad credit, no credit, or other financial issues. Cosigners agree to put their own credit on the line and become legally responsible for paying back a loan for someone lenders think is a high-risk borrower.

If you’re currently a cosigner and are tired of the risks of having legal responsibility for someone else’s debt, you may be interested in getting your name off the loan. If you asked someone else to cosign for you, you may also be interested in getting the cosigner off the loan so your debt will no longer impact your loved one.

But, can you get a cosigner off the loan if you want to? It depends upon the situation. Here are a few options to try to absolve a cosigner of legal liability for a debt.

See if your loan has cosigner release

Some lenders that require cosigners establish policies up front for when cosigners can be absolved of their legal responsibility to repay loans. This is called cosigner release. Private student loan lenders commonly allow for cosigner release, but other kinds of loans may also have this policy.

When a loan allows cosigner release, the lender sets conditions up front. If the conditions are met, the lender will remove the cosigner from the loan. The lender may require two years of on-time payments, for example. If that’s the case, after the 24th consecutive month of payments, there’d be an opportunity to get the cosigner off the loan.

Review your loan terms carefully to find out if you have cosigner release as an option. If you do, start working on meeting the conditions and follow the process for the cosigner to be removed from the loan as soon as you become eligible.

Ask your lender

If your lender does not have cosigner release as a standard loan feature, that doesn’t mean the lender will never be willing to absolve the cosigner of responsibility. You can always ask.

Lenders will usually be reluctant to remove a cosigner from a loan because doing so makes it harder for them to collect if something goes wrong. Once the cosigner is no longer on the loan, the lender would only be able to pursue a claim against the primary borrower -- and the lender has little reason to limit their options for collecting on the debt.

But, if the primary borrower has made all payments on time, has an improved credit score and a good income, and has been a good customer, the lender may be willing to work with you. You can contact customer service to find out -- the worst that could happen is they’ll say no.

Refinance the loan

Refinancing a loan is often the best and only option if you want to get a cosigner off a loan and the lender won’t release the cosigner of liability.

Refinancing means the primary borrower responsible for repaying the existing loan will take out a new loan that’s only in his or her own name -- no cosigner will guarantee the loan. Once the primary borrower has this new loan, the money from it can be used to pay back the existing loan with the cosigner.

Of course, refinancing is possible only in circumstances where the primary borrower can actually qualify for a new loan on his own. If the issues that necessitated the cosigner in the first place haven’t yet been resolved, this will not be a viable option.

Primary borrowers should focus on improving their credit so they can try to qualify for a loan without a cosigner. While it may take some time, on-time payments of the existing debt will both spare the cosigner credit problems and help the primary borrower build credit so they’ll qualify for a new loan in their own name.

The primary borrower should look for a refinance loan with the lowest interest rate possible, and should make sure payments on the new loan are affordable. While it normally doesn’t make sense to take out a loan at a higher interest rate to refinance existing debt, it may make sense to do this -- if necessary -- when the goal is to remove a cosigner. Paying a slightly higher rate may be worth absolving the cosigner of his responsibilities and getting the debt off the cosigner’s credit report.


What if you can’t get the cosigner off the loan?

If you can’t remove a cosigner from a loan because you can’t refinance and the lender won’t allow it, there are few other options.

If the cosigner signed for a loan with a tangible asset -- such as a car loan or a mortgage loan -- selling the car or the home to pay off the loan is one solution. This is often undesirable, but may be the only choice if the cosigner absolutely must have their name off the loan.

Cosigners who are trying to protect their credit may also decide to pay off the loan -- or at least pay the minimum payments -- if the primary borrower isn’t paying. While this obviously  isn’t an ideal outcome, avoiding long-term damage to the cosigner’s credit score may make it worth doing. This is especially true if cosigner release is a possibility. The cosigner could pay the minimums for the required time to get released from the loan. Then they would no longer be responsible, so their credit wouldn’t be destroyed if the primary borrower didn’t pay.

Both cosigners and primary borrowers should know, however, that any private agreement they reach will not impact a creditor’s ability to collect. If you cosigned a loan for your husband, you got divorced, and your divorce decree said your husband was solely responsible for paying a debt you cosigned for, the creditor could still try to collect from you if your husband doesn’t pay.

Getting a cosigner removed can be a big ordeal

Getting a cosigner released from a loan is a big hassle and not always possible. Because of the big downsides of cosigning and the fact that removing cosigners from a loan is so hard, it’s best to avoid borrowing with a cosigner unless doing so is absolutely essential.

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