Can I Refinance a Car Loan with a Cosigner?

Yes, you can refinance a car loan with a cosigner — and by mitigating risk for lenders, adding one can significantly improve your chances of approval and securing better terms.

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If your credit score or income isn’t strong enough to qualify for a loan (or favorable loan terms) on your own, a cosigner with strong credit can make all the difference. 

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Amid economic challenges, 68% of Gen Zers and millennials feel that the current climate hurts their ability to achieve financial independence. As a result, many younger borrowers are likely to rely on family support — an indication that cosigning is here to stay.

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This article walks you through the steps of refinancing with a cosigner so you can make the best decision. 

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The cosigner’s role during refinancing

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A cosigner shares legal responsibility for a loan, stepping in if payments are missed or the loan defaults.

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Here are three common scenarios when a cosigner might be involved in refinancing an auto loan:

1. Your credit history is limited. If you have limited credit history or a low score, a cosigner can boost your chances of approval and help you secure better terms.
2. You’re seeking better loan terms. If your credit has declined, adding a cosigner with strong credit can help you find more favorable refinancing conditions.
3. You’re removing a cosigner. If your credit or income has improved, the cosigner may no longer be needed and can be removed through refinancing.

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Keeping an existing cosigner

Keeping the same cosigner when refinancing a car loan can be advantageous. You could unlock lower interest rates, secure more favorable terms and even streamline the approval process.

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Lenders typically allow borrowers to keep the same cosigner during refinancing as long as their credit score and income still meet the eligibility requirements. But be sure to confirm with your lender that your cosigner is still eligible before you begin refinancing. 

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Adding a cosigner

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If you’re struggling to qualify for a car loan refinance on your own, adding a cosigner can improve the odds of lenders approving your request. Typically, your cosigner will need to have good to excellent credit (a score of 670 or higher), but requirements can vary by lender.    

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It’s also important to consider some potential drawbacks of cosigned refinancing for longer terms:

• Greater interest costs: While extending the loan term may lower your monthly payments, it can lead to paying more total interest over the life of the loan.

• Cosigner risk: If you face financial difficulties, your cosigner will share full responsibility for the loan, which could strain their finances and credit.

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Refinancing to remove a cosigner

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Refinancing to remove a cosigner can be a smart move. Here are some common scenarios when it might make sense:

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• Improved credit: If your credit score has significantly improved since you got the original loan, you may now qualify for a lower interest rate and better terms on your own.
• Cosigner protection: If your cosigner experiences financial difficulties, removing them can protect their credit health. This keeps your loan from potentially affecting their ability to secure other financing.
• Life changes: Life events like divorce or changes in family dynamics can prompt the need to remove a cosigner. Refinancing might help you navigate the transition.

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Benefits of having a cosigner

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Here are four reasons you might consider refinancing your car loan with a cosigner:

1. Improved chances of approval: A cosigner with good credit and a solid financial history can improve your application’s chances of approval. They can help bridge the gap if your income or credit score doesn’t meet lender requirements.
2. Better loan terms: A cosigner might help you secure lower interest rates, reduced monthly payments, and more favorable repayment conditions than you could obtain on your own.
3. Improved credit: Every on-time payment you make on the refinanced loan can positively impact both your and your cosigner's credit scores.
4. Flexibility in refinancing options: Having a cosigner can give you more options if you need to adjust your loan terms in the future due to unforeseen circumstances. This might mean lowering your monthly payments to free up cash flow or modifying your loan in other ways to suit your financial situation.
   
   

Drawbacks of having a cosigner

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Refinancing a car loan with a cosigner can help secure better terms, but it also comes with potential downsides to consider:

1. Credit risk: Both you and your cosigner are technically responsible for loan repayment. Missing a payment or defaulting on the loan can harm both credit scores.
2. Financial inflexibility: Cosigning increases the cosigner’s debt-to-income ratio, which may limit their ability to take out new loans or credit.
3. Shared liability: A cosigner is equally responsible for the loan. If you cannot make payments, the cosigner must step in to cover the debt. This responsibility can lead to financial strain for the cosigner. 
4. Difficulty removing the cosigner: Removing a cosigner from a loan is often a complicated process that can require refinancing the loan. 

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How to refinance a car loan with a cosigner

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Here’s how to refinance a car loan with a cosigner:

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Step 1: Check credit scores

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Both you and your cosigner should start by checking your credit scores. This confirms your eligibility for refinancing and helps you get a sense of the loan terms you may qualify for. The stronger your cosigner's credit, the better refinancing terms you’re likely to receive.

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Step 2: Understand the cosigner’s role

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It’s essential that both parties are clear on the cosigner’s legal and financial responsibilities. Keep in mind that the cosigner is equally liable for the loan, meaning their credit will be negatively affected by missed payments or defaults.

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Step 3: Gather the paperwork

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Prepare the necessary documents for both you and your cosigner. Typically, you’ll need to at least provide recent pay stubs or tax returns, government-issued IDs and loan details from your current lender.

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Step 4: Shop around

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Research lenders that allow cosigners and compare their offers. Carefully review and compare their offers, focusing on interest rates, loan terms and additional fees. Using an auto refinance calculator can help you compare savings potential of different offers. 

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Step 5: Apply

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Once you’ve chosen a lender, submit the application with your cosigner’s details. Both you and your cosigner will need to provide personal and financial information, such as income and employment history.

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Step 6: Review the loan terms

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After approval, carefully review the loan terms with your cosigner before signing. Make sure that both of you understand the interest rate, monthly payment and any fees associated with the refinance.

Step 7: Complete the refinancing process

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After signing the new loan deal, the new lender will pay off your existing car loan. You can then start making payments on your new loan — ideally with better terms.

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FAQs

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Here are two common questions about refinancing a car loan with a cosigner:

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Can I refinance with a different cosigner than my original loan?

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Yes, you can add or replace a cosigner during refinancing. However, the new cosigner must meet the lender’s qualifications, including creditworthiness and income requirements.

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Can I remove a cosigner without refinancing?

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Generally, you cannot remove a cosigner without refinancing the loan, although some lenders offer a cosigner release — an agreement that removes your cosigner from the loan. This can impact your loan terms and interest rate, though.

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If a cosigner release isn’t an option, you’ll likely need to refinance to remove your cosigner. Another method can be to pay off the loan in full, which would release the cosigner from their obligation.

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Check with your lender to explore all your options.

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