When purchasing a car, you need either to have good credit with solid proof of a certain income or have the cash at hand. When the primary concern is your income, then a dealership might require you to have a co-borrower or co-buyer. Over time, your income might improve to a point of not needing the co-buyer to remain on the loan. Today, we’ll look at How to Remove a Co-buyer from a Car Loan.
Who is a co-buyer?
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A co-buyer is a co-borrower who serves as a joint applicant on your car loan. In essence, a co-buyer is basically an equal owner of the car. What this means is that your co-buyer receives all of the benefits as well as responsibilities of owning the car. They also have the same rights to use the vehicle and they are also on the hook for the car loan payment.
As partners in this purchase, both you and your co-buyer are required to sign all the documents that are associated with the loan and the sale. Typically, these include:
- A finance agreement contract
- Car title
- Sales contract
- Car registration
Who are joint applicants?
Co-buyers who apply together for a loan on a car they will own are also known as joint applicants. The lender looks at the combined financial and credit information of the joint applicants as a single borrower. Using a joint applicant is ideal because it can increase the amount of available income to repay the loan thus improving the debt-to-income ratio
What rights does a co-buyer have?
Most times a co-buyer is either a spouse, family member or friend. Regardless of who your co-buyer is they have equal rights to the vehicle. Therefore whether you are the primary borrower or the co-borrower, both of you share the same rights to the car and the loan as the two of you are equally responsible for making payments.
Bankruptcy with co-buyers
In the event that one of you is bankrupt thus affecting the repayment of the car loan, it is the duty of the primary borrower to file for bankruptcy. In this case, the co-buyer gets equal protection during the bankruptcy process and vice versa since both of you claim equal ownership to the vehicle.
Ensuring a car you purchase on loan is simple. Typically, if you got the car loan with a joint applicant then the co-buyer needs to be listed on the policy since they share ownership rights with the primary borrower. Many insurance companies base the cost of coverage on age because younger drivers tend to pose more of a risk. Therefore, the cost of coverage is typically based on the younger of the two co-buyers.
Does it make a difference who is the primary buyer or co-buyer for financing?
Money mismanagement or the credit mishaps of your partner can come back to bite you, especially when buying a car on loan as joint applicants. Lenders base car loan approval and the interest rate on the highest-risk borrower. In addition to your credit scores, your combined incomes help the lender to determine if you’re capable of repaying the car loan.
When filling out a car loan application, it generally doesn’t make a difference who is listed as the co-borrower or the primary borrower as you both share equal rights and equal responsibilities to the loan repayment.
Income impacts the order in which you are listed on the car loan application. The one who earns more is usually listed first as the primary borrower and the lower earning applicant as the co-buyer or co-borrower. When the lender or banker’s representative takes your application, they generally have to follow this rule of thumb. Even if you fill out the application on your own, the order in which you list yourselves has no bearing on the decision of the lender as long as credit score and income information is correct.
When you both intend to use the vehicle then you are considered as co-buyers or co-borrowers. Consequently, you are both responsible for repaying the loan with any defaults or missed payments leaving black marks on both your credit reports regardless of who defaulted. The lender puts into consideration the middle credit score of each applicants’ tri-score report and then uses the lower of these two scores to help determine the eligibility as well as the interest rate.
The strength of one borrower’s credit does not compensate for the other party’s bad credit. In this sense, one bad credit score can jeopardize the deal for both applicants or kill the deal altogether.
Since lenders hold co-borrowers or co-buyers equally responsible for the car loan, then it requires that both of your names be signed on the car title. The way you choose to hold the car title will depend on your personal and financial interests in the car.
How to remove a co-buyer from a car loan
A joint car loan can be issued with two named on the lease. This is done in most cases because the two individuals will be sharing the debt. This strategy is ideal because it can also be used to increase the total limit available by combining the two incomes on the car loan application. At a certain point down the line, both parties involved may come to the decision that it is better for one to take on the loan separately.
Whether you no longer need the co-buyer to remain on the loan or they want you to remove them from it for their own financial purpose, there are a few ways you can get your co-borrower or co-buyer to be removed from the auto loan.
Here are some of them:
1. Refinance the loan
Refinancing the loan means that you will be taking out new financing in your own name without the co-buyer. If the lender is to remove the co-buyer, you will need to refinance the loan on your own.
If the lender doesn’t permit any modification then you have the option of taking out another loan to pay off the car loan in full. Once the car loan is repaid in full then both parties are relieved of their obligation. Moving forward, the party that took out the new loan will retain all ownership of the asset. Keep in mind that there will be additional fees as well as penalties to this refinancing and modification.
You will still be required to determine which one of you has the legal right to close the loan and open another one as a single owner of the car. If this can’t be settled by both parties outside of court, then a judge will have to make the decision for you.
2. Sell the vehicle
More often than not, the easiest way to get out of a joint auto debt is to simply sell the vehicle. If there are any profits made, each party has a right to collect and vice versa if the car is sold at a loss. Since a car is most likely to depreciate in value, chances are that some amount will still be owed to the lender on the loan which means both parties are required to contribute equally.
In the event that one party held more weight when repaying for the car, the percentage that you both contribute will either be determined by a mutually signed agreement or through a legal process in court. Once the debt is closed though, the two parties involved will not be legally obligated to continue with the connection they once shared through the joint auto loan originally.
3. Modify the loan
Although it happens rarely, in some cases, the current lender might let you modify the loan thus allowing you to retain the original contract. In nearly every instance, however, you will be required to pay a modification loan. As mentioned earlier this only happens with some lenders and for very unique reasons.
For instance, if one person on the loan dies, then you can modify the loan easier to list only the survivor. If you are a married couple going through a divorce, then the lender may permit loan modification so that the asset can remain with a single person, more so the one who retains the right to own the vehicle. Establishing who has the right, however, may be the biggest challenge.
4. Settle the matter in court
The advantage of taking a joint car loan is that it doesn’t give priority to one borrower or buyer over the other. By law, each has an equal stake in the car as well as its debt. In the event that there is a dispute in regards to who will retain the rights to the car, a judge may be required to settle the matter thus requiring you both to go to court.
Divorce is the most common scenario for this problem and in divorce court, the judge usually splits debts and assets. In this case, whoever is awarded ownership of the automobile will go ahead with the refinancing or modification to remove the other person from the car loan.
What does it mean for me if I remove a co-buyer from a car loan through refinancing?
Without established credit, most people will require the help of a spouse, parent or trusted friend to help qualify for a car loan. As you begin to build your credit you may realize that you no longer need the name of the other party tied to the car loan. If this is your case then refinancing will allow you to remove a co-buyer from the car loan. In fact, it is often the only available option if you want to remove the other person from the loan.
But what does it mean for you?
1. You need to pass the credit test
If you want to refinance your car loan, first you need to meet the minimum credit requirements of the lender without the help of your co-buyer. In the event that your credit score is lower than that of the co-buyer then brace yourself for the possibility of a higher interest rate than the one, you’re currently paying.
Having a good payment history on your current loan will work tremendously in your favor. In this case, you have a shot at meeting the credit criteria as long as you don’t have a late payment history, accounts in collection or judgments on your other revolving lines of credit.
2. Show that you have sufficient income
Once you have passed the credit test, the next step is to prove that you can make the loan payments. Since previously you qualified on two incomes, you will need to show that yours alone will be sufficient enough to repay the loan without defaulting or any other issues.
Before you consider refinancing, it is advisable that you wait until your income has increased. As proof of your income, lenders will want you to show them your recent pay stubs, tax returns, and W-2 forms.
3. Assess your debt-to-income-ratio
Even if you present your lenders with documents showing that you are earning enough money to cover for the auto loan payment, they will still need to assess your debt-to-income-ratio. This is because on paper, you might have what appears to be an adequate income but it would mean nothing if you have high payment obligations as well.
If you want to calculate your debt-to-income ratio, the first step is to add up all your monthly debt payments. Secondly, you need to divide the total from your gross monthly income. To know if your debt-to-income-ratio is fine for refinancing, it ideally has to be below 36 percent.
Things to consider
If you can’t qualify for refinancing and you still want to remove the co-buyer from the car loan then consider other ways including modifying the loan or settling the matter in court. Remember, when removing the co-buyer from the loan, you will also want to remove their name from the automobile title. Even though you will not be needing the co-buyer to refinance, you will need them to willingly sign over the rights on the title. Failure to remove their name means that they still have equal rights and ownership to the vehicle.
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Step by step guide for taking a co-buyers name off a car title
Removing a co-buyers name off the car title may be necessary for a variety of reasons including divorce, gifting the car to someone else, inheritance and much more. Generally, removing a co-buyers name from the title is not difficult if the conditions are in your favor. However, there are a few technical details that need to be treated with care.
In short, you will have to treat the change on the title as a transfer or sale of the car. However, there are some special circumstances in which you may be treated differently when doing this.
1. Treat the name removal as a sale
When removing the co-buyers name from the title, they should complete the sections on the back of the title certificate as though they were selling the car. The other person whose name will remain on the title will then be listed as the buyer. The ‘sole buyer’ will then take the completed title to the DMV (Department of Motor Vehicles) and complete the steps needed to be issued with a new title.
2. Check how the name appears on the current title
How both your names appear on the title makes a very huge legal difference. The title may be joined by ‘and’ or ‘or’ and sometimes it may be ‘and/or’. If both your names are joined by ‘and’ then you two will have to sign the car title as ‘seller’ making the tansfer to the one person whose name is going to remain on the title. If both your names are joined by ‘and/or’ or ‘or’ then either person can without the use of the other legally complete the transfer.
In other states such as Arizona however, the ‘and/or’ is treated differently. In this state for instance, if the names of the car title appear as A ‘and/or’ B then it is treated in the same way as ‘and’ thus both parties involved must sign the transfer.
3. Check with your co-buyer
If the original title of the car has more than one lien-holder listed then you have two options. The first one is to get your co-buyer to agree to change or you pay off the loan in full. If you cannot get your co-buyer to agree to change or you are unable to pay the loan in full, then you will not be permitted to take off their name from the title at that time.
In the event that all goes in your favor and now you can make the name change here are a few steps you need to take to complete the transfer:
4. Complete the form on the back of the car’s title certificate
To do this, you will be required to filling all the spaces as though you were selling the car. The ‘seller’ is the person whose name will be coming off the title while the ‘buyer is the name of the person whose name will be remaining on the title.
5. Be very careful when filling the forms
It is crucial that you fill out the form neatly and completely. This is because, in many instances where you make a mistake and cross out the error, the DMV may refuse to accept the form. In this case, you will have to request a completely new title and then begin the process of the transfer all over again.
There are states that require that both your signatures be notarized. For your own sake, you need to find this out ahead of time if it applies to you. If it does, do not complete the form until a notary is present.
Other states require that you fill out the forms at the DMV in person. Again, it is important that you find out if this applies to your state as well. Call the DMV offices and find out if it is possible to make an appointment. This way, you will be able to reduce the amount of time that you will need to wait.
6. Take your forms to your local DMV
In most cases, you will be required to do the transfer at the DMV in person. In other states, the paperwork can be submitted through the mail. Call the DMV in the state that you live in or check their website online to find out which of these two situations applies to you.
7. Find out what additional forms may be needed to make the transfer
In case the co-buyer of the car passes away, you need to find out what additional papers will be needed for you to make the transfer or if there are any additional steps required. If for instance the car was acquired by a married couple and one dies, the surviving spouse can generally submit the original title together with a copy of the death certificate.
If the car was left to someone in a will however, the executor of the estate will be required to submit an affidavit or certificate along with the title of the car. In any event, you are advised to get a probate lawyer involved so as to make sure that the transfer of the vehicle is properly completed and to the satisfaction of both parties.
What to do if the co-buyer refuses to sign off the title
As mentioned earlier, if the names on the title appear as A ‘and’ B then both of you must participate in changing the title of transferring the car from a joint possession to sole possession. However, if your co-buyer refuses, the only way to force the transfer is by filing a complaint in court. This will help you in getting an order to require the transfer.
Removing your co-buyer from the loan can be equally as hard as it can be easy depending on your situation and the relationship with the other party. Now that you have the knowledge, you can go ahead and start the process of removing your co-buyer from the car loan.