How To Remove Yourself As A Cosigner On A Loan

Cosigning a loan can help someone you know pay important expenses, buy a home or finance a car. Then again, there are risks involved with being a cosigner and as such, many reasons why you might want to back out of your agreement. Learn how you can remove yourself as a cosigner on a loan.

What Is A Cosigner?

A cosigner is somebody who signs an official document, like a loan agreement, with another person. They take equal responsibility for the loan and the cosigner understands that when he signs, he becomes liable for the full amount owed. Having a cosigner increases the probability that the lender or creditor will get their money back; in case the person receiving the loan is unable to pay it off.

When Is A Cosigner Needed?

Cosigners or guarantors are usually required when the person applying for the loan:

Has a poor or no credit history
Has a low credit score
Doesn’t have the minimum income required
Is unemployed
Is self-employed
Is a student with an inadequate credit history

Most of these situations represent a high level of risk for the lender. A cosigner helps take away part of the risk and increases the likelihood of approval. The cosigner becomes responsible for any payments that are not made.

Can You Remove Your Name From a Cosigned Loan?

Remember, by co-signing a loan, you’re agreeing to take over someone’s payments when they can’t afford them. That can make it tough to get out of your contract, especially if the original borrower has a large unpaid balance. Currently, there’s no set procedure to get removed as a loan cosigner. It’s all up to the lender.

Whether they’re a bank or private company, most lenders won’t let you off the hook until they’re sure the primary borrower can handle the payments alone. To get the lender to remove you as a cosigner, the primary borrower will have to prove their finances are strong enough to cover their payments on their own.

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Ways To Remove Yourself As A Co-Signer

Here are a few of the ways you can go about removing yourself as a cosigner.

1. Refinancing

If you want to remove yourself as a cosigner, you can ask the borrower to refinance their loan in their name only. You can refinance between each term throughout the duration of your loan. When they refinance, they can change the terms of the loan agreement including removing the cosigners and possibly even reducing their interest rate.

Refinancing can be a great option because it can not only remove your name as a cosigner, it can lead to lower payments and a reduced rate. This can be applied to most types of loans and is the most favourable option, especially for loans with large balances.

2. Improve Borrower’s Credit Rating

If you want to remove yourself as a cosigner before the loan has been fully paid off, you can try asking the lender to remove you as the cosigner. Some lenders may be willing to do so if the primary borrower can show that they can handle the loan on their own.

The primary borrower can help strengthen their credit and finances with the following:

Check Credit Report For Errors – The borrower should pull their credit report and check if there are any errors on their credit report that may be affecting their credit scores.
Pay Off Other Debts – If the borrower has fewer debts, the lender may be more willing to remove you as cosigner as more of the borrower’s income can be used towards the loan.

3. Pay Off The Loan Faster

If you want to be removed as a cosigner due to a personal financial reason, you can ask the primary borrower if there’s some way they could pay off the loan faster, whether that’s through lump-sum payments, more frequent payments or higher payments.

4. Sell The Financed Asset

When the loan is secured against an asset, like a house or car, the borrower could try selling it to repay their debt. Some lenders may allow them to transfer their payment plan to someone else too, like with a car loan.

5. Close The Account

If the borrower hasn’t been able to make payments for a while and still hasn’t improved their credit rating enough to be approved for a new loan, it may be time to close the account. If it is a secured loan, you can speak to the lender selling the asset and paying off the loan. That way you can close the account and remove your name as cosigner. If it’s an unsecured loan, you may need to pay or transfer the balance, but it may be worth it to remove your name.

6. Find A New Cosigner

You can also ask the primary borrower if someone can replace you as a cosigner. If they do, they’ll have to take a new loan or refinance it with the new cosigner. Finding a cosigner who’s more comfortable taking over another person’s loan payments when necessary, may be the easiest solution for the borrower.

What Happens If You Can’t Remove Yourself As A Cosigner?

If your lender won’t let you or the borrower out of the loan contract, your last option might be to pay the remaining balance and move on. While it can be expensive and inconvenient, it’s better than the alternative; letting the loan payments pile up until they ruin both your bank accounts and credit scores.

Since you’ll become responsible for their loan if the borrower defaults, declares bankruptcy or dies, every payment you miss from that point on can damage your credit. Down the line, having a credit score below 650 can make it harder for you to qualify for loans, good interest rates, rentals and even credit cards.

Can The Primary Borrower Remove You As A Cosigner?

Unfortunately, the original borrower cannot simply take your name off their loan contract but there are a few things they can do to avoid problems with their lender:

Consolidate the Debt – When all else fails, the borrower could cut their losses and repay their debt. If that’s impossible, maybe they can apply for a debt consolidation loan, enter a debt management program or offer a debt settlement.

Refinance Their Loan – Depending on what type they have, the borrower may be able to take out another loan to replace their first (known as refinancing). Common with mortgages, this gives them a longer payment plan and new rate.

Additional Reading

Cosigner FAQs

Who can be a cosigner?

Basically, anyone who’s past their provincial/territorial age of majority (18 or 19) and able to handle the loan if the primary borrower can’t. Although requirements may vary, applicants with solid incomes, decent credit scores (650 – 900) and good payment histories usually have less difficulty qualifying.

How will i know if the co-signed loan is being paid on time?

If your finances and credit seem healthy, it’s probably safe to say the borrower is paying their loan. That said, be sure to check your credit report often, since missed payments will appear as negative marks on your payment history and potentially hurt your credit scores.

Will I become responsible for the loan if the person I co-signed for declares bankruptcy?

Cosigners aren’t always protected if the borrower goes bankrupt. While certain bankruptcies offer some security for the cosigner during the court case, others can end in them being held responsible for the full debt. Even if the borrower negotiates a lower payment, their lender may assign the rest of their debt to the cosigner.

Will my credit be affected by co-signing a loan?

It depends on how the payments are made. A record of the loan will show up on your credit report and, if the borrower pays their loan, you may see improvements to your credit scores. However, the opposite may occur when they miss payments, so if the borrower can’t afford their debt, it might be safer for everyone if you take over.

Can I remove myself as a cosigner?

By negotiating with the lender, you may be able to remove yourself as a cosigner but once you’ve signed a contract, there’s no guarantee. If the borrower gets behind on their payments on a large loan, the lender may hold you responsible.

Final Thoughts

As you can see, even though it’s possible to remove your name as a cosigner, being a cosigner is still very risky. If you don’t know or trust the person well, do not cosign. Similarly, if the borrower has lost their job but really needs a loan, do not cosign. You do not want to be responsible for somebody else’s debt, as you will lose money and your credit could be negatively affected. Despite how important it may be for the borrower, always think of your financial needs first.

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Bryan Daly

Bryan is a graduate of Dawson College and Concordia University. He has been writing for Loans Canada for five years, covering all things related to personal finance, and aims to pursue the craft of professional writing for many years to come. In his spare time, he maintains a passion for editing, writing screenplays, staying fit, and traveling the world in search of the coolest sights our planet has to offer. Bryan uses the BMO Cash Back Mastercard to earn cash back on everything from boring bill payments to exciting excursions. He is also a strong saver, holding both a TFSA and an RRSP account in order to prepare for his future while taking full advantage of tax benefits.