Published in: Personal Loans | Oct. 14, 2019
What Is Cosigner Release, and When Is It an Option?
By: Christy Bieber
Cosigner release can help absolve you of responsibility for a loan you cosigned for -- but when can you do it?
Many people cosign for loans for loved ones because they want to help them gain access to funds that would otherwise be unavailable, or because they want to help them get a loan at a lower rate.
But cosigning is not without risks. Cosigners have a legal obligation to repay loans if the primary borrower doesn't pay. This is a major responsibility that can have far-reaching consequences because cosigners can have their credit ruined and face legal action if the primary borrower defaults.
Cosigner release is one way that a cosigner could be absolved of this legal liability. It allows the cosigner to get this debt off their credit reports and no longer be held legally responsible for it. When cosigner release is available, the lender agrees to let the cosigner off the hook and only hold the primary borrower accountable for the debt. It is available only in a few situations, such as when someone has cosigned for student loans. And when it is not available, the only way to get a cosigner off a loan is to refinance it.
This guide to cosigner release will help you to understand more about this option, which reduces the risk involved when guaranteeing a loan.
What is cosigner release?
Normally, cosigners remain legally responsible for a loan for the entire duration of the time the loan is being paid back. If the loan has a long repayment period, this could mean that the cosigner is at risk for many years because at any time during the repayment process, the primary borrower could default and leave the cosigner on the hook.
Cosigner release, however, can provide a way out. Cosigner release occurs when the lender agrees that the cosigner's promise to repay the debt is no longer necessary. If this happens, the cosigner's name is taken off the loan and the cosigner is absolved of any legal responsibility. Instead, the debt becomes 100% the responsibility of the primary borrower.
When is cosigner release an option?
Cosigner release is typically an option only for student loans. Many private student loan lenders require cosigners so that students can qualify for funding. This is necessary because young people who are attending school rarely have much income and often do not have time to earn a good credit score or even develop much of a credit history before they need to borrow.
Parents and other relatives regularly cosign for young people who are taking out student loans but don't want these cosigned loans to be on their credit for years to come. Fortunately, private student loan lenders often offer cosigner release after the primary borrower fulfills certain requirements, such as making a set number of on-time payments.
It is important to realize that this is not necessarily an option for every private student loan -- while some lenders advertise this as a key feature, others don't allow cosigner release at all.
Similarly, when it comes to other kinds of loans, cosigner release is rarely available. If you have cosigned to help someone get a credit card, personal loan, or auto loan, it's likely that you will be stuck with your name on the loan for the duration.
It's important to be aware of whether the lender provides any options for the cosigner to be absolved of liability and removed from the loan after a set period of time. Cosigner release can reduce the risk of cosigning because you'll only be on the hook for the loan if the borrower defaults before you've been formally released from your obligation. This can be a much shorter time than it ultimately takes the borrower to repay the loan in full.
What can you do if cosigner release is not available?
If cosigner release is not available, there is still a way a cosigner could be cleared of responsibility for the loan he or she's cosigned for. This can happen if the primary borrower is able to refinance the loan in his or her own name.
Refinancing would require the primary borrower to take out a new loan. This would be possible without a cosigner only if the primary borrower's credit or income has improved. If the borrower has the same financial circumstances that necessitated the cosigner in the first place, chances are good that a cosigner would be needed again, and so there'd be little benefit in attempting to refinance.
But if the primary borrower can now qualify for credit on his or her own, the primary borrower could get a new loan without a cosigner and use the proceeds to back off the cosigned loan in full. The cosigner wouldn't have to worry anymore since the debt would show up as paid off on his or her credit report. And there'd be no outstanding balance left for the creditor to collect if the primary borrower couldn't continue to make payments.
Cosigner release can reduce the risk of cosigning for a loan
Some private student loans allow cosigner release after the primary borrower has made as few as 24 on-time payments. This means that a cosigner could be free and clear of legal responsibility for the loan after just two years -- even if it takes the primary borrower much longer to pay off the balance.
When cosigner release is available -- and becomes an option after a short time -- the cosigner won't have to worry about the debt showing up on his or her credit report for a long loan repayment timeline. And if the borrower defaults or is late on payments after the cosigner's name has been removed from the loan, the consequences of this won't hit the cosigner.
If you're considering cosigning, always ask about options for cosigner release first. While it is still a big decision to decide to cosign, you can breathe easier if you know the commitment you're making is a short-term one.
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