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Updated on Friday, February 10, 2017
Being a co-signer has risks. If the primary borrower does not pay, you may be on the hook for debt and your credit score could be negatively affected. You may have signed on for a child’s student loans to help them through college or helped your brother get a new car or credit card. After some time has passed, you want to remove yourself as the co-signer.
According to the Federal Trade Commission, 75% of cosigners end up paying some portion of the loan because the primary borrower was not making payments on time.
Here are 4 ways to remove yourself as a co-signer:
1. Refinance the Loan
One of the best ways to get your name removed as a co-signer is to have the loan refinanced in the primary borrower’s name, which will essentially replace one loan with another, usually with a lower interest payment or better terms. For mortgages, car loans, and student loans the process for refinancing is pretty straightforward.
To get started, the primary borrower would need to go through a process very similar to the one used to obtain the original loan. He or she would need to provide their credit history and income information to the lender, which could be a bank, a credit union, or an online lending company. If the loan is approved, it can replace the old debt, which would release you from the liability and establish new payments and terms for the borrower.
Note: The borrower will need to have a good credit score in order to refinance his or her loan. If their credit is poor, unfortunately, this may not be an option and you may be stuck as their cosigner. They will need to improve their credit score and try again later.
2. Ask to Be Removed
Depending on the credit history of the primary borrower, some lenders may give the co-signer the option to be removed after a certain period of time, though this situation is rare, as it does not benefit the lender. Check the loan documents to see if your loan allows this. You may also call the lender to inquire. In some situations, the primary borrower may be able to have you removed as the co-signer.
3. Transfer the Balance
Sometimes you may have to be more creative to be removed as a co-signer. One way to do it is by using a 0% balance transfer credit card. If the primary borrower can get approved, it could allow them to pay down the balance without paying any interest while also letting you off the hook. You can use a balance transfer from several different types of debts, including student loans, home equity loans, credit cards, auto loans, and personal loans.
In terms of the borrower, transferring certain types of debts makes more sense than others. For example, most balance transfer credit cards give you 12-18 months before they start charging interest. If you cannot pay the debt in full by that time, the interest rate could be a lot higher than it originally was. Large amounts like student loans and auto loans may not be the best move unless the borrower can pay them off within the 0% interest time frame.
4. Sell the Asset/Pay Off the Balance
Depending on your relationship with the person you cosigned for and the type of debt, you could just pay off the debt or ask them to sell the asset and take whatever financial loss you might face. It may not be the most financially savvy method, but it works. As a co-signer, you agreed to be the backup in the event the primary borrower does not make payments. Though you might have their best interests at heart, you’ll want to make sure that you’re in the position to make any payments to protect your own credit.
Additional Questions to Answer:
What are the pros and cons of removing yourself as a co-signer?
Financially speaking, there aren’t many cons to removing yourself as a co-signer. Without the co-signer tag, you’re back in full control of what happens to your credit score. The one potential con could be what happens to your relationship with the borrower.
If you’re attempting to end a co-signer relationship due to a missed payment or financial irresponsibility of the borrower, you could sour a close relationship. But this doesn’t always have to be the case. If you set the right expectations going into it, removing yourself as the co-signer could be a welcomed event instead of a painful breakup. If the borrower’s credit has improved, being removed could be seen more like a financial graduation.
What if the other co-signer won’t cooperate?
If the borrower does not cooperate, unfortunately your options are limited.
“There is very little you can do. The only path is to seek legal advice,” says Neal Frankle, certified financial planner at Credit Pilgrim. You may have to get a lawyer to write a letter on your behalf to the lender seeking to be removed from the loan. But if you signed a legitimate contract, chances are low that they’ll release you. Says Frankle: “The issue is getting the lender to agree.”