Borrowers with a bad credit history can still get loan approval by using a co-borrower. But once you get a high enough credit score, can you remove your co-borrower from the loan? Learn the benefits of using a co-borrower and what steps you can take to adjust a loan agreement.
What Is a Co-Borrower?
Bad credit scores can make it hard for consumers to qualify for a loan. And if a person does obtain a loan offer, the repayment terms will not be ideal since a bad credit score affects your interest rate.
Loans have a risk-based pricing system. Lenders will offer loan terms that offset the financial risk if your credit history shows you are an unreliable borrower. As the sole borrower, you will have to pay more interest fees due to bad credit. But if a borrower has good credit, lenders may offer reduced prices on loans and higher loan amounts.
Applying for a loan with a co-borrower can help you obtain better loan prices despite having bad credit. A co-borrower shares financial responsibility with the primary borrower. When a monthly payment is due, both parties are responsible for paying.
For example, when you apply for a mortgage loan with your spouse, you have decided to pay off the loan together and share ownership of the property. The mortgage lender will list you and your spouse as co-borrowers on a joint mortgage loan. With the joint mortgage loan, the lender will require information and documentation for both applicants.
How Is a Co-Borrower Different From a Co-Signer?
A co-borrower is very similar to a co-signer, which is why many consumers confuse the two terms. However, the level of financial responsibility a person has is the main difference between a co-signer and a co-borrower. Co-borrowers share equal responsibility for monthly payments on the loan, but co-signers act as a financial backup.
Suppose you take out a joint auto loan with your significant other and you become unemployed and can’t pay bills. In that case, your partner must continue making auto loan payments because they share vehicle ownership. Co-signers are not responsible for making monthly payments right away. Still, they are responsible for the remaining loan balance if the primary borrower cannot continue paying off the loan.
Why Do Consumers Remove Co-Borrowers From a Loan?
A co-borrower can help bad credit borrowers get loan approval and competitive interest rates. However, you may want to remove a co-borrower from the loan at some point. There are various reasons why borrowers make adjustments to their loan agreement. Still, the two most common reasons include a relationship fallout and financial strain.
Relationships are constantly changing, and unfortunately, fallouts do occur. Suppose you obtained a monthly installment loan with a friend or significant other to furnish your joint apartment. An unexpected dispute can crumble the relationship, and you may want to become the sole borrower.
Dealing with unexpected financial issues can be incredibly stressful. When a co-borrower falls on hard times, a joint loan can place additional strain on their finances. If they cannot afford to keep making monthly payments, removing them from the loan may be ideal.
How To Remove a Co-Borrower From a Loan
Removing a co-borrower from a loan is possible, but the removal process may be difficult. Unlike a co-signer, a co-borrower has equal ownership of assets and shares financial responsibility. If you applied with a co-borrower due to a low credit score, your lender might be hesitant to remove them from the loan contract.
Closely examine your loan agreement to determine if the lender allows the removal of a co-borrower. Many lenders will enable the release of a co-borrower under certain conditions. For example, you must first repay a certain percentage of the loan. Ask your lender for clear answers if you have any questions about your loan.
Below are a few ways you can remove a co-borrower from a loan:
Refinance the Loan
Refinancing may be the simplest way to remove a co-borrower from a loan. The refinance process means applying for a new loan to replace an existing one. Borrowers often refinance to get a lower interest rate or extended repayment length. But refinancing can also help borrowers add or remove co-borrowers to a loan.
If your credit score has improved since you obtained your existing loan, you may quickly get approval for a refinanced loan. However, you may have difficulty getting a loan offer if your credit score has since decreased.
Borrowers can choose to apply with the same lender or a new one.
Sell the Asset
If you obtained a secured loan with a friend or family member, such as an auto or mortgage loan, you could sell the asset to free yourself of the loan. If neither co-borrower wants the asset, you can both agree to sell it.
Suppose you have a buyer that wants your financed vehicle. In that case, you can talk to the lender about transferring the vehicle title. To buy a financed car, the potential buyer must apply with the lender and meet the eligibility requirements. If the lender agrees to a title transfer, the buyer assumes financial responsibility for the remaining loan balance.
Borrowers can sell real estate with conventional or FHA loans attached. Ideally, the home should have equity, as you are more likely to find a buyer. Once you sell your property, you can use the proceeds to pay off the mortgage loan and split the remaining profit with your co-borrower. You can consider a loan assumption if only one co-borrower wants the property. A loan assumption is a process that allows a borrower to assume full financial responsibility and take over existing mortgage payments. The loan terms do not change with a loan assumption, but it releases the co-borrower from the financial obligation. If your co-borrower wants to relinquish their claim on the property, they can file a quitclaim deed. A quitclaim deed allows a property owner to relinquish ownership rights. If your co-borrower files this type of deed, you gain whatever interest the co-borrower has in the property.
Pay off the Loan
If you only have to pay a few more loan payments, you can pay off the loan with your co-borrower. Paying off debt releases both borrowers from the financial contract. Paying debt can positively impact your debt to income ratio, which looks good on a credit report. Having less debt to your name can make qualifying for a loan easier without asking someone to co-sign.
The Bottom Line
There are various ways to remove a co-borrower from a loan. However, your ability to adjust your loan depends on your lender and your loan contract. Read your agreement carefully to determine what steps you can take. If you have any questions, ask your lender to clarify your options.