Help, I Need to Get the Cosigner Off My Car Loan!

how to get a cosigner off a car loan

We’ve had many readers write in after a divorce and ask how to split their assets with an ex-spouse. One of the most common questions is how to remove an ex or another cosigner from a car loan and title. Here’s how to go about it.

What’s the Role of a Cosigner?

It can be challenging to remove a cosigner from a loan. To gain a better understanding of why, let’s look at why a cosigner is used at all. Essentially, a cosigner is needed when the borrowers own credit and/or income isn’t enough to qualify for the loan by himself or herself. The cosigner, presumably, has stronger credit and income, and is required by the lender or creditor to help guarantee that the loan will be repaid.

Loans involving a cosigner include a cosigners notice. The notice asks that the cosigner guarantee the debt. This means that if the original borrower fails to make payments on the debt, then the cosigner becomes responsible for the balance. The cosigner then is obligated to make payments until the debt is paid when the borrower can’t.

Co-signing a loan is risky for the cosigner, because it can affect the cosigner’s credit if the borrower doesn’t satisfy the debt and the cosigner has to take over. The debt can ultimately affect the cosigner’s credit scores and access to revolving credit, such as credit cards.

Before co-signing a loan, a cosigner should be sure that he/she is able to comfortably take on the monthly payments if it comes to that. The cosigner should also make sure he/she doesn’t need to get a loan of his/her own over the course of the cosigned loans terms.  Cosigning on the borrower’s debt will affect the cosigner’s overall credit utilization and ability to secure other credit opportunities in the meantime.

Now that you know the role of a co-signer let’s look at what you can do to remove them from a car loan if needed.

Refinance the Car Loan to Get the Cosigner Off

You may be able to refinance a car loan in your own name to get your cosigner off the loan. In essence, you’ll buy the car from your ex-spouse and go through the car buying process again.

The spouse who is responsible for the car loan payments, the primary signer, should ideally assume credit liability for the loan. It’s a also good idea to go through this process right away, regardless of what your divorce decree states.

Divorce decrees (or court orders) don’t release either person from his/her obligations under the original contract of the loan. That means that if you and your ex-spouse have a joint account, like a car loan, and if the spouse who is supposed to pay doesn’t, the negative credit history will end up on both of your credit reports, and those late payments will damage both of your credit ratings. In fact, the other person may not know about the unpaid account until a collection agency calls.

Removing your ex from the car’s title, if the car already paid for, is similar and requires working with the Department of Motor Vehicles (DMV). You’ll both need to sign a change of title/vehicle ownership form and return it for processing. You can check online or call your state’s DMV for details and forms.

In some states you can file a transfer of title between family members, if the divorce has not been finalized yet. A transfer of title lets you avoid getting any needed inspections or certifications and paying taxes on the vehicle based on the purchase price. (If you live in the state of California, for example, research changing vehicle ownership versus transferring a car title.)

See if You Have a Cosigner Release Option

Some car loans include conditions that remove the cosigner’s obligation after a specified number of on-time payments are made by the primary borrower.

If you’re unsure if this is an option, talk to the lender and check any loan documents you have. The cosigner release option is probably one of the easiest methods of taking a co-signers name off a car loan.

Pay Off the Loan

Another option to get a cosigner off a car loan is to pay off the loan either directly or by selling the car. If you sell the car, you can use the money to pay off the loan. With luck, the sale value of the car will be sufficient to cover the remainder of the loan.

Be aware that if you are the cosigner, and the primary borrower fails to make payments, you can likely seize the asset and sell it.

This article was originally published February 20, 2013, and has since been updated by another author.

Image: iStockphoto

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Credit 101: What Is Revolving Utilization?

Aerial view of a young woman with brown hair contemplating her revolving utilization. She has a pen in her mouth and an open notebook on her desk.

According to Experian, the average credit score in the United States was just over 700 in 2019. That’s considered a good credit score—and if you want a good credit score, you have to consider your revolving utilization. Revolving utilization measures the amount of revolving credit limits that you are currently using, and it accounts for a large portion of your credit score.

Find out more about what revolving utilization is, how to manage it, and how it impacts your credit score below.

What Is Revolving Credit?

To understand revolving utilization, you first have to understand revolving credit. Revolving credit accounts are those that have a “revolving” balance, such as credit cards.

When you are approved for a credit card, you are given a credit limit. If you have a credit card with a limit of $1,000 and you use it to buy $200 worth of goods, you now have a $200 balance and an $800 remaining credit limit.

Now, if you pay that $200, you again have $1,000 of open credit. If you pay $150, you have $950 of open credit. But your credit revolves between balance owed and how much open credit you have available to use. How much you have to pay each month—known as the minimum payment—depends on how much your balance owed is.

Other forms of revolving credit include lines of credit and home equity lines of credit. They work similar to credit cards.

What Isn’t Revolving Credit?

Unlike revolving credit, installment loans involve taking out a lump sum and paying it back in an agreed-upon fashion over a set term of months or years. Typically, you agree to pay a certain amount per month for a certain number of months to cover the amount you borrowed plus any interest.

With an installment loan, the amount of your monthly payment is determined by your loan agreement, not the balance due. Common types of installment loans include vehicle loans, personal loans, student loans, and mortgages.

What Is Revolving Utilization?

Revolving utilization, also known as “credit utilization” or your “debt-to-limit ratio,” relates only to revolving credit and isn’t a factor with installment loans. Utilization refers to how much of your credit balance you’re using at a given time.

Here’s how to determine your individual and overall credit utilization:

  1. Look at your credit reports and identify all of your revolving accounts. Each of these accounts has a credit limit (the most you can spend on that account) and a balance (how much you have spent).
  2. To calculate individual utilization percentage on an account, divide the balance by the credit limit, and multiply that number by 100.
    1. $500/$1,000 = 0.5
    2. 5*100 = 50%
  3. To calculate overall utilization (all revolving accounts), add up all of the credit limits (total credit limit) and all of the balances (total spent) on your revolving accounts. Divide the total balance by total credit limit, and multiply that number by 100.

If you have a credit card with a $1,000 credit limit and a balance of $500, your utilization rate is 50%, for example. For the same card, if you have a balance of $100, your utilization rate is 10%.

When it comes to your credit score, revolving utilization is typically calculated in total. For example:

  • You have one card with a limit of $1,000 and a balance of $500.
  • You have a second card with a limit of $4,000 and a balance of $400.
  • You have a third card with a limit of $3,000 and a balance of $600.
  • Your total credit limit across all three cards is $8,000.
  • Your total utilization across all three cards is $1,500.
  • Your revolving utilization is around 19%.

How Can You Reduce Revolving Utilization?

You can reduce revolving utilization in two ways. First, you can pay down your balances. The less you owe, the less your utilization will be.

Second, you can increase your credit limit. If you apply for a new credit card but don’t use it, you’ll have more open credit, and that can reduce your utilization. You might also be able to ask your credit card company to review your account for a credit increase if you’re an account holder in good standing.

Find the Right Credit Card for You

What Is Revolving Utilization’s Impact on Your Credit Score?

Your revolving utilization rate does impact your credit. It’s the second-largest factor in the calculation of your credit score. Your utilization rate accounts for around 30% of your score. The only factor more important is whether you make your payments on time.

Why is credit utilization so important to your score? Because to lenders, it can say a lot about you as a borrower.

If you’re currently maxed out on all your existing credit, you may be struggling to pay your debts. Or you might not be managing your debts in the most responsible fashion. Either way, lenders might see you as a riskier investment and be less inclined to approve you for loans or other credit.

How Do You Know If You Have a Revolving Utilization Problem?

Sign up for Credit.com’s free Credit Report Card. It provides a snapshot of your credit report and gives you a grade for each of the five areas that make up your score. That includes payment history, credit utilization, age of credit, credit mix, and inquiries. The credit report card makes it easy for you to see what might be negatively affecting your credit score.

You can also sign up for ExtraCredit, an exciting new product from Credit.com. With an ExtraCredit account, you get a look at 28 of your FICO scores from all three credit bureaus—plus exclusive discounts and cashback offers as well as other features—for less than $25 a month.

Sign Up Now

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What Is the Average Used Car Loan Rate?

average-used-car-loan-rate

Article originally published July 13th, 2016. Updated October 30th, 2018.

More people are opting to lease their new set of wheels instead of purchasing them, according to Q2 2018 data from Experian.

The number of auto loans grew to an all-time high, with leasing surpassed 30% of all new consumer vehicle sales. But the interest rates consumers are getting on these loans has stayed low, especially for used cars. In fact, Experian reported that average loan rates saw some increases, but still remain historically low.

Loan rates for a new car in Q2 of 2018 were 5.76%, up from 5.20% a year prior. Franchise used rates are 8.28% (down from 7.88% in Q2 2017), while independently used rates are 11.87% (down only 0.17% from Q2 2018).

The Experian Automotive scoring deems prime consumers as those with scores of 661 to 850, nonprime users with scores of 601 to 660, and subprime users as those with scores of 300 to 600. Consumers on all risk tiers are increasingly choosing to lease over purchasing cars, according to the report.

The number of prime consumers choosing used vehicles increased from 55.61% in Q2 2016 to 55.79% in Q2 2018. The number of nonprime and subprime consumers also saw increases, from 21.75% to 22.05% and decreases of 25.71% to 25.05%, respectively.

Experian reported that the increased number of prime consumers choosing used vehicles resulted in “score increases, greater percentages of used financing in the prime risk tier and lower average used rates.”

Getting a Car Loan

If you’re thinking about buying a used car and taking out an auto loan to do it, it’s a good idea to review your credit first. Having a good credit score can help you qualify for better terms and conditions on your financing. (To find out where your credit stands, you can see two of your credit scores for free, updated every 14 days, on Credit.com.)

And when you’re figuring out how much you can afford, remember to consider not only how much your monthly car payment will be but also how much the loan will cost you in the end, by considering the interest rate and length of the loan term. (The longer the loan term, the more interest you will pay.)

If you aren’t happy with what you see, don’t worry — you may be able to improve your credit scores by paying down any big credit card balances, disputing errors and limiting credit inquiries until your score has had time to rebound.

Gather All Documentation

When attempting to get a used car loan, you will want to gather all the necessary documentation including the following:

  • Your Driver’s License
  • Proof of all of your income- this can be a paycheck stub or even a tax return
  • A utility or phone bill to prove your residency
  • Your social security number so they can run your credit check

These days, you can often apply for the used car loan right online or even by phone which makes it the process that much easier and accessible.

Start With Your Own Banking Institution

It is always a good idea to start with your own bank or credit union for financing because you have already established history and relationship with them. Typically, you will be able to find the absolute best rates and more favorable terms if you go through your own bank.

They will also be able to advise you on all the options that are available to you as you begin the journey toward car ownership.

Shop for the Best Rates

You never want to settle on the first rate you are given; don’t be afraid to shop around to see if you can find something better than the typical auto loan rates. You will find the best auto loan rates if you have good credit. Additionally, if you apply for multiple loans within a 14 day period, it will only count as one hard inquiry so that you can find the best rate possible.

What is the Average Used Car Loan Rate?

Typically, you will find that the car loan rate on a used car is going to be a bit higher than the rates you would find with a newer car. For example, good credit car loans can see an interest rate as low as 3.9% for a newer model and a little more than 5% for its older version.

Average Auto Loan Rates by Credit Score

The following are the average rates you may find for a used car loan that carries a 60-month repayment term based on a range of different FICO Scores.

With a credit score between 500 and 589, you may be looking at interest rates on the loan as high as 16%. A bad credit score also makes it a lot harder to get approved for the car loan initially as well.

A credit score in between 590 and 619 will typically see the 15% mark, and the percentages get lower from here with the lowest coming in at 4.39% with a credit score between a 720 and 850.

A longer loan term will usually mean you will have a lower monthly payment, but you will also accrue more in interest with a longer loan term.

Bottom Line

When determining the average used car loan rate and the amount of interest you may have to pay on a loan, you will want to check all three of your credit reports, examine your credit score and credit history and determine what steps you can take to improve your credit, so you can qualify for a lower interest rate.

Again, if you bank with a credit union, always start there first because the lender will already be able to see if you are high risk or not. Car buyers should always take their time, do their research, and tackle the work of fixing their credit prior to obtaining a loan for a car. It is always best to shop smarter and save money in the long run.

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How Much Cash Do You Really Need to Buy a Home?

Are you ready to buy a home? You’re not alone—in 2019, more than five million people bought an existing home. And that doesn’t even include the number of people who purchased new construction.

The point is, the housing market is always bustling and busy. And if it’s your first time buying a home, it might seem a bit daunting. You might have a couple of questions—how much money do you need to buy a home? And how can you even get those funds?

Overwhelmed? Don’t be. We’re here to guide you towards saving up, so hopefully you’ll be able to afford your dream home. Keep reading to learn more!

How Much Do You Need for a Down Payment?

Let’s start with one of the first payments you might have to make—a down payment. When someone takes out a mortgage loan, they’ll put down a percentage of the home’s price. That’s the down payment.

You might’ve heard that down payments are about 20% of the total cost of your new home. That can be true, but it really just depends on your mortgage. There are mortgage options that require little to no down payment, and how much you need often depends on your eligibility for different programs. Here are some different loan options:

1. USDA Mortgage

The USDA guarantees mortgages for eligible buyers primarily in rural areas. These loans do not have down payment requirements. To qualify for a USDA loan:

  • The property must meet eligibility requirements as to where it’s located.
  • Your household must fall within the income requirements, which depend on your state.
  • You must meet credit, income and other requirements of the lender, though they may be less rigorous than loans not backed by a government entity.

2. Conventional Mortgage

Conventional mortgages are financed through traditional lenders and not through a government entity. Depending on your credit and other factors, you may not need to put down 20% on such loans. Some lenders may allow as little as a five percent down payment, for example. But you’ll have to pay private mortgage insurance (PMI) if you put down less than 20%.

3. FHA Mortgage

FHA loans, like USDA loans, are partially guaranteed by a government agency. In this case, it’s the Federal Housing Administration (FHA). A down payment on these loans may be as low as 3.5%. Requirements for an FHA loan can include:

  • You’re purchasing a primary home.
  • The home in question meets certain requirements related to value and cost.
  • A debt-to-income ratio between 43% and 56.9%.
  • You meet other credit requirements, though these may not be as strict as with conventional loans.

How much do you need to make to buy a $200K house?

Given the above information, here’s what your down payment might look like on a home worth $200,000:

  • USDA loan: Potentially $0
  • Conventional loan: From $10,000 to $40,000
  • FHA Loan: As low as $7,000

These are just some options for mortgages with low down payment requirements. Working with a broker or shopping around online can help you find the right mortgage. In addition to the down payment, you do need to ensure that you can afford the mortgage and make the monthly payments.

Don’t Forget the Cash You’ll Need for Closing

Closing costs are typically between three and six percent of your mortgage’s principal. That’s how much you’re borrowing, so the less you put down, the more your closing costs might be.

Here’s a range of closing costs assuming a cost of three percent of the low range home purchase, when buying with less than 20% down:

  • For a home purchase between $500,000 and $600,000, you’ll need at least $15,000 for closing costs
  • Between $300,000 and $500,000, at least $9,000 for closing costs
  • Between $150,000 and $300,000, at least $4,500 for closing costs

Where Can You Get the Money to Buy a Home?

These numbers should give you an idea of how much cash you’ll need for a home purchase. Acceptable sources for procuring cash to close on a house can be one or any of the following:

  • Stocks
  • Bonds
  • IRA
  • 401(k)
  • Checking/ savings
  • A money market account
  • Retirement account
  • Gift money

The key here is that the money needs to be documented. You have to be able to prove you had it and didn’t borrow it simply for the purpose of making your down payment or covering closing costs.

Don’t have cash available from any of the above-mentioned sources? There are other sources you can use as long as they can be paper-trailed, such as your tax refund or a security deposit refund on your current home rental.

Plan for Other Important Costs

While down payments and closing costs are the biggest out-of-pocket expenses involved in buying a home with a mortgage, you may need to cover other costs. There might be some additional home buying and moving-in costs. Those could include inspections, the cost of any necessary repairs not covered by the sellers and moving fees.

Are You Ready to Buy a Home?

Saving up the right amount of money is just one step in buying a home. You must also ensure your credit score is in order. Lenders look at different credit scores when they consider someone for a mortgage. Sign up for ExtraCredit to get a look at 28 of your FICO Scores to understand how lenders might see you as a borrower. Once you check your scores, you can decide whether you need to build your score or start shopping for your mortgage.

Sign up for ExtraCredit today!

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Does Paying Off a Loan Early Hurt Your Credit Score?

A woman in a red shirt sits in front of her laptop with her head in her hands.

Paying off debt to build credit is a pretty well-known strategy. It can help improve your credit score, especially if you’re carrying a large balance on your credit cards. So if you have other types of debt, like car or home loans, paying off those accounts might seem like a step in the right direction.

But here’s the thing—having a mix of accounts in your credit history is goodfor your credit score. You’ll actually want to have a good mix of revolving and installment loans. So does paying off a loan early hurt credit?

Does Your Credit Score Drop When You Pay Off Debt?

Unfortunately, paying off non-credit card debt early might make you less credit-worthy according to scoring models. When it comes to credit scores, there’s a big difference between revolving accounts (such as credit cards) and installment loan accounts (such as a mortgage or student loan).

Paying an installment loan off early won’t improve your credit score. It won’t necessarily lower your score, either. But keeping an installment loan open for the life of the loan could help maintain your credit score.

Credit Cards vs. Installment Loans

Credit cards are revolving accounts, which means you can revolve a balance from month to month as part of the terms of the agreement. Even if you pay off the balance, the account stays open. A credit card with a zero balance—or a very low balance—and a high credit limit is good for your credit score because it helps lead to a low credit utilization rate.

Installment loan accounts affect your credit score differently. An installment loan has a set number of scheduled payments spread over a predetermined period of time. When you pay off an installment loan, you’ve essentially fulfilled your part of the loan obligation. The balance is brought to $0, and the account is closed.

Does Paying Off a Loan Build Credit?

Paying off an installment loan as agreed over time does build credit. In part, that’s because 35% of your credit score is based on timely payments. And if you make timely payments for five or more years on an installment loan, that’s a lot of goodwill for your credit score.

Types of Credit and Length of Credit History

Credit scores are typically better when a consumer has had different types of credit accounts. It shows that you’re able to manage different types of credit. Your credit mix actually accounts for 10% of your credit score.

The age of your credit impacts your credit score. It accounts for around 15% of your score. Eventually, closed accounts fall off your credit score, which can reduce the age of your overall credit—and subsequently, your credit score.

Does Paying Off a Loan Early Hurt Credit?

If you’re thinking about paying off an installment loan early, take some time to think about it. Could you keep it open? It could be an active account with a solid history of on-time payments. Keeping it open and managed shows creditors that you can maintain the account responsibly over a period of time.

Consider other possible consequences of paying off a loan early. Before you pay off your loan, check your loan agreement for any prepayment penalties. Prepayment penalties are fees that are owed if you pay off a loan before the term ends. They’re a way for the lender to regain some of the interest they would lose if the account was paid off early.

Paying Off a Mortgage Loan Early

Sometimes paying off your mortgage loan too early can cost you money. Here are steps you can take to lighten those expenses:

  • When paying extra toward a mortgage each month, specify that the extra funds should be applied toward your principal balance and not the interest.
  • Check with the mortgage lender about prepayment penalties. These penalties can be a percentage of the mortgage loan amount or equal to a set number of monthly interest payments you would have made.
  • To help protect your future credit score, always make sure you have money set aside for emergencies and only pay extra if you can afford to do so.

Paying Off an Auto Loan Early

If you’re looking to pay your auto loan off early, there are several ways you can do so. When paying your loan each month, it might be beneficial to add an extra $50 or so to your payment amount. That lets you pay off the loan in fewer months and pay less in interest over the loan term. If possible, specify that the extra amount is to pay principal and not interest.

Another option is to make a single, large extra payment each year. Mark the payment as an extra payment toward principle. Do not skip another auto payment because you made this one, as your lender might consider you late if you do.

Repaying and Paying Off Student Loans

There are no prepayment penalties on student loans. If you choose to pay student loans off early, there should be no negative effect on your credit score or standing. However, leaving a student loan open and paying monthly per the terms will show lenders that you’re responsible and able to successfully manage monthly payments and help you improve your credit score.

The Bottom Line: Will Paying Off a Loan Improve Credit?

Paying off a loan and eliminating debt, especially one that you’ve been steadily paying down for an extended period of time, is good for both your financial well-being and your credit score. But if you’re thinking of paying off a loan early solely for the purpose of boosting your credit score, do some homework first to ensure it will actually help. If paying a loan off early won’t help your score, consider doing so only if your goal is to save money on interest payments or because it’s what’s best for your financial situation.

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