Can I refinance a car loan with a cosigner?

By | September 12, 2023

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Can I refinance a car loan with a cosigner?deepblue4you – Getty Images

Auto loans are a popular option for financing new and used vehicles. As of 2022, approximately 31% of Americans used an auto loan to finance their vehicles. Another 14% didn’t yet have a car loan but expected to get one within six months.

If you have an existing loan but are unhappy with the terms, you probably have some questions about how to improve the situation. Can I refinance a loan with a cosigner? Can I add a new cosigner? How do I remove a cosigner from my car loan?

Fortunately, there are many ways you can refinance your loan to get better terms. Understanding all of your choices will help you find the best path for your personal needs and specific finances.

Are you looking to refinance? Compare car loans here

What is a loan refinance?

A loan refinance allows you to take out a new loan to pay off your existing car loan. This may help you get better terms than you originally agreed to. If you purchased your car without comparing loan options or are in a different financial situation than when you applied for the loan, refinancing can help.

Refinancing your car loan can give you the opportunity to:

  • Secure a better interest rate.

  • Change the loan term.

  • Lower your monthly payments.

  • Pay off your loan faster.

When you refinance your auto loan, you have the opportunity to change many aspects of it. It is important to carefully review the terms and details of your original loan before comparing refinancing options. You may keep, remove, or add a cosigner as part of the refinancing process, which can significantly change the terms of your loan.

What is a cosigner on a loan?

A cosigner is someone who agrees to take responsibility for a loan along with the primary borrower. The borrower expects to make payments on the loan, and the cosigner has the same responsibility if the borrower fails to make payments. The cosigner may have to make payments or even repay the loan in full if the primary borrower defaults.

From the lender’s perspective, a cosigner ensures repayment of the loan. With a cosigner in place, the creditor has not one but two people he can contact for repayment purposes.

A cosigner assumes the same risk as the primary borrower. If the primary borrower fails to make payments on the loan, the default will affect the cosigner’s credit score, just like that of the primary borrower. The borrower should be especially careful about the position he puts his cosigner in if he does not make timely payments on the loan.

What are the benefits of having a cosigner?

A cosigner is essentially a secondary loan applicant who adds their creditworthiness to yours as a borrower. If you have a low credit score or short credit history, you may have difficulty getting an auto loan personally. A cosigner with an established credit history and good score increases the chances that a lender will grant you approval.

A cosigner can also help offset difficulties you may be experiencing, such as an employment gap or a high debt-to-income ratio. Lenders see them as significant risk factors. If you don’t have a long, stable employment history, a lender may be concerned about your ability to repay the loan. This is true even if your current debts consume a significant portion of your monthly income.

A cosigner with a stable credit history, high income and low debt is desirable for lenders. Adding a solid cosigner to your loan not only increases your chances of approval but also improves the terms of your loan. A financially stable cosigner will typically allow you to secure a lower interest rate.

Carrying a loan with a cosigner can also help you build your credit. Having several lines of credit, such as an auto loan, mortgage and credit card, increases your credit score. Getting a loan now makes it easier to qualify for lower interest loans in the future.

What are the disadvantages of having a cosigner?

Having a cosigner on your loan typically improves your offerings. However, problems with loan repayment can put a strain on your relationship with your lender. Co-signers are typically immediate family members. A cosigner will want strong guarantees that you can and will make timely payments on the loan.

If you are in a difficult financial situation, you should let your cosigner know. Late payments will hurt the cosigner’s credit. Therefore, you should notify your cosigner whenever you are concerned about your ability to pay on time and in full. To keep your credit score intact, your cosigner may have to take on payments you can’t afford.

Before taking out an auto loan with a cosigner, consider your finances carefully. Evaluate your budget and make sure you can easily afford the monthly payments on your car loan. Keep this loan at the forefront of your obligations to protect your relationship with the person cosigning for you.

How to Keep a Cosigner When Refinancing

If you have a cosigner on your loan but are unhappy with the terms, you may want to talk to them about refinancing your loan. You can refinance your auto loan with a new lender or apply for a refinanced loan with your current lender while keeping your cosigner. The process is similar to the one you followed when you took out the initial loan together.

As with the initial loan, your cosigner must fill out an application with you. The lender will check your credit and that of your cosigner. With this information, the lender will make an offer. You and your cosigner will then need to sign the new loan agreement.

Since the lender will consider both your and your cosigner’s credit, you should have an open discussion about finances with your cosigner before applying for refinancing. Any changes in your cosigner’s financial situation will affect your loan offer. If your cosigner’s credit score has dropped, they’ve lost their job, or their income-to-debt ratio has increased, they may not offer the same benefits you previously provided.

However, if your cosigner’s financial situation has improved, it may help you get better terms than before. The same goes for your financial situation. Consider your position carefully before you begin refinancing so you can determine whether keeping your cosigner is the best move.

How to add a cosigner to your loan

People often refinance their loans because their financial situation has improved and they qualify for better terms. If this is not the case, you may have difficulty finding a lender to help you refinance your auto loan with a lower interest rate. Adding a cosigner can help.

If you didn’t have a cosigner on your original loan, adding one now can help you get a better deal. If you’re having trouble keeping up with your car payments, you may want to consider refinancing with a cosigner so you can adjust the terms. With a financially stable cosigner, you may benefit from a lower interest rate, which will reduce your monthly payments.

Refinancing also allows you to change the term of your loan. A longer loan term will reduce your monthly payments. However, keep in mind that this route has some drawbacks. The longer it takes to pay off your loan, the more you will pay in interest. With a long-term loan, you also risk ending up “upside down” on your loan, which is when your vehicle is worth less than what you owe your lender.

How to Remove a Cosigner from a Loan

If your financial situation has improved significantly since you first applied for the loan, you may find that you can refinance and remove the initial cosigner. Getting a good rate on your own is more difficult but not impossible. You will have a better chance of improving your terms if your initial loan had a high interest rate or if interest rates have decreased since you initially applied for the loan.

Even if you can’t significantly improve your terms, you may want to remove your cosigner for other reasons. Perhaps this person can no longer bear the burden of servicing your loan. The initial loan payment can reduce a cosigner’s debt-to-income ratio and improve his or her personal credit score.

If you are refinancing, you can remove the cosigner by simply applying for a refinance loan without including the cosigner. Your new loan will only see you as the sole borrower. You release the cosigner from any liability when you repay the initial loan using your new loan.

If refinancing your loan doesn’t interest you, it may also be possible to remove your cosigner while keeping your current loan. Contact your lender to discuss your situation. Your lender can walk you through the process of requesting a cosigner release. This will remove your cosigner from the agreement while keeping the initial loan the same.

Whether you choose to keep, remove, or add a cosigner to your auto loan, refinancing can help you improve your financial situation. Remember, however, that you may incur an early repayment fee when you close one loan to open another. The process of applying for a new loan will also slightly lower the credit score of anyone included in the loan. Carefully explore all the options available to you so you can make the best financial choice for your needs and manage your vehicle conveniently.

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