Can I Refinance a Car Loan With a Cosigner?

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

If you have a loan in place but are unhappy with the terms, you probably have some questions about how you can 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 auto loan?

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

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 signed on for. If you purchased your car without comparing your loan options or you’re in a different financial situation now than when you took out the loan, refinancing may help.

Refinancing your car loan can give you the opportunity to:

• Secure a better interest rate.
• Change the length of the loan.
• Decrease your monthly payments.
• Pay off your loan faster.

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

What Is a Cosigner on a Loan?

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

From the lender’s standpoint, a cosigner assures the loan’s repayment. With a cosigner in place, the lender has not one but two people they can contact for repayment purposes.

A cosigner takes on just as much 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 the primary borrower’s. The borrower should be especially mindful of the position they put their cosigner in if they don’t 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 the borrower. If you have a low credit score or a short credit history, you may struggle to get a car loan personally. A cosigner with an established credit history and good score increases your likelihood of a lender granting you approval.

A cosigner can also help compensate for difficulties you may face, such as a gap in employment or a high debt-to-income ratio. Lenders see these as significant risk factors. If you lack a stable, lengthy work history, a lender may worry about your ability to repay the loan. This is also true 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 to 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 diverse lines of credit, such as a car loan, mortgage, and credit card, boosts your credit score. Qualifying for a loan now makes it easier to qualify for lower-interest loans in the future.

What Are the Drawbacks of Having a Cosigner?

Having a cosigner on your loan typically improves your offers. However, problems with repaying the loan can strain your relationship with the person who cosigns for you. Cosigners are typically close family members. A cosigner will want strong assurances that you can and will make timely payments on the loan.

If you find yourself in a difficult financial situation, you should communicate this to your cosigner. Late payments will hurt the cosigner’s credit. Therefore, you should notify your cosigner whenever you’re concerned about your ability to pay on time and in full. To keep their own credit score intact, your cosigner may have to take over the payments you can’t afford.

Before setting up a car loan with a cosigner, consider your finances carefully. Evaluate your budget and ensure you can easily afford the monthly payments for your car loan. Keep this loan at the forefront of your obligations to protect your relationship with the person who cosigns for you.

How to Keep a Cosigner When You Refinance

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

As with the initial loan, your cosigner must complete 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 credit and your cosigner’s credit, you should have an open discussion about finances with your cosigner before you apply for refinancing. Any change in your cosigner’s financial situation will affect your loan offer. If your cosigner’s credit score has fallen, they’ve lost their job, or their income-to-debt ratio has increased, they may not offer the same advantages that they previously provided.

However, if your cosigner’s financial situation has improved, they may help you get better terms than you had before. The same is true for your own financial situation. Carefully consider where you both stand before you start 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’re eligible for better terms. If this isn’t the case, you may struggle to find a lender to help you refinance your car 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 struggling to keep 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 qualify for a lower interest rate, which will lower your monthly payments.

Refinancing also allows you to adjust the length 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’ll pay in interest. With a long loan term, you also risk getting ‘upside down’ on your loan, which is where 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 your loan, you may find you can refinance and remove the initial cosigner. Getting a good rate on your own is more difficult but not impossible. You’ll have an especially good chance of improving your terms if the initial loan had a high interest rate or if interest rates have fallen since your initial loan application.

Even if you can’t improve your terms significantly, you may want to remove your cosigner for other reasons. Perhaps this individual can no longer maintain the burden of carrying your loan. Paying off the initial loan can reduce the cosigner’s debt-to-income ratio and improve their personal credit score.

If you’re refinancing, you can remove your cosigner simply by applying for a refinance loan without including the cosigner. Your new loan will feature you alone as the sole borrower. You release the cosigner from all responsibility 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 take your cosigner off the agreement while maintaining the same initial loan.

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