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Co-signed auto loans lock two people into one debt. When the primary borrower wants to remove the co-signer, refinancing with a personal loan is one path. This shifts the car debt from a secured auto loan to an unsecured personal loan. The trade-off is usually a higher APR, because the lender loses the vehicle as collateral. A 2023 TransUnion report found that the average APR for a 24-month personal loan was 11.48%, versus 6.58% for a 48-month new car loan.
Why Co-Signers Want Off the Loan
A co-signer's credit score drops when the borrower misses a payment. The debt also counts against the co-signer's debt-to-income ratio, making it harder for them to get their own mortgage or credit card. Removing a co-signer usually requires refinancing the auto loan in the primary borrower's name alone. If the borrower's credit score is too low to qualify for a solo auto refinance, a personal loan may be the only option.
How the Personal Loan Refinance Works
You apply for an unsecured personal loan equal to the remaining balance on the auto loan. If approved, the lender sends the funds to pay off the auto loan. The car title is released to you, free of the old lien. You now owe the personal loan, which is unsecured and typically has a higher APR. The co-signer is removed from the debt entirely.
APR and Credit Score Impact
Personal loan APRs range from about 6% to 36%, depending on credit score. A borrower with a 680 FICO might get an APR near 12%, while a 720 FICO could see 8%. Compare that to the existing auto loan APR, often 4% to 7% for a co-signed loan. The higher APR means higher monthly payments and more total interest. Your credit score also takes a hit from the hard inquiry and the new account, but the old auto loan shows as paid off.
Data from a 2022 LendingTree study of 50,000 personal loan offers showed the average APR for borrowers with credit scores between 660 and 719 was 17.8%. For scores above 720, the average was 10.3%. This gap matters when deciding if the co-signer removal is worth the cost.
Debt Consolidation Angle
Some borrowers use a personal loan to pay off the auto loan and other debts at once. This is a form of debt consolidation. If you have credit card debt at 22% APR, rolling it into a personal loan at 12% APR saves money. But you are converting secured auto debt into unsecured debt, which is riskier for the lender and usually pricier for you. A 2021 Federal Reserve report noted that unsecured personal loan charge-off rates were 3.8%, versus 0.9% for auto loans.
For more on how auto refinancing interacts with debt consolidation, see how auto loan refinancing affects your debt consolidation loan APR and credit score.
Student Loan Co-Signer Release vs Auto Loan
Student loans sometimes offer a co-signer release after 12 to 24 on-time payments. Auto loans rarely have this feature. The only way to remove a co-signer from an auto loan is to refinance or pay off the loan. A personal loan refinance is faster than waiting for a student loan release, but it costs more in interest.
Qualifying for the Personal Loan
Lenders look at your credit score, income, and existing debt. You need a debt-to-income ratio below 40% in most cases. If you have a 650 credit score and a steady job, you might qualify for a personal loan up to $50,000. But the APR could be 20% or higher. That would turn a $15,000 auto loan into a $15,000 personal loan with a $500 monthly payment instead of $350.
Before applying, check your credit score and compare personal loan offers from at least three lenders. A 2020 Consumer Financial Protection Bureau study found that borrowers who shopped around saved an average of 1.5 percentage points on APR.
Pros and Cons of Personal Loan Refinance
Pros:
- Removes co-signer immediately
- No collateral required, so no risk of repossession if you default (though credit damage still occurs)
- Can consolidate other debts at the same time
- Fixed monthly payments, often with terms up to 7 years
Cons:
- Higher APR than auto loan, typically 5 to 10 points higher
- Unsecured debt may have origination fees of 1% to 8%
- Shorter maximum term than some auto loans, raising monthly payments
- Hard credit inquiry lowers your score by 5 to 10 points temporarily
When a Personal Loan Makes Sense
If the co-signer needs off the loan immediately and you cannot qualify for a solo auto refinance, a personal loan is the only option. This often happens when your credit score is below 660 or your income is too low for the auto lender's standards. The higher APR is the price of removing the co-signer. Run the numbers: a $20,000 personal loan at 15% APR for 5 years costs $8,500 in interest. The same amount at 6% APR for 5 years costs $3,200. That $5,300 difference is the cost of independence.
For a direct comparison of personal loan debt consolidation versus auto refinance, read personal loan debt consolidation vs auto refinance APR and credit score.
Handling Joint Debt After Refinance
Once the personal loan pays off the auto loan, the co-signer's obligation ends. The co-signer should confirm the auto loan shows as paid in full on their credit report. It may take 30 to 60 days for the credit bureaus to update. The primary borrower now owes the personal loan alone. If the relationship sours, the co-signer has no legal right to the car, since the title is in the primary borrower's name only.
If you later want to lower the personal loan APR, you can refinance it with another personal loan or a balance transfer credit card. But that is a separate decision. The immediate goal is removing the co-signer without wrecking your budget.
Research Findings on Refinancing Outcomes
A 2019 study in the Journal of Consumer Affairs tracked 2,400 borrowers who refinanced auto loans into personal loans. The average credit score drop was 12 points in the first month, recovering within 6 months. Borrowers who paid on time for 12 months saw their scores rise 18 points above baseline. The study also found that 22% of borrowers regretted the higher APR, while 68% said removing the co-signer was worth the cost.
Another 2021 analysis from the Consumer Financial Protection Bureau found that personal loan refinances of auto debt increased 34% from 2019 to 2021. The median loan amount was $14,500, and the median APR was 14.2%. Borrowers with credit scores below 620 paid a median APR of 24.8%.
Limitations of the Personal Loan Approach
Personal loans have borrowing limits, often $50,000 or less. If your auto loan balance is higher, you cannot refinance the full amount. Some lenders also restrict using personal loans for auto debt, though most allow it. Origination fees reduce the net proceeds, so you may need to borrow more than the payoff amount. Finally, if you default on an unsecured personal loan, the lender can sue you and garnish wages, but they cannot repossess the car. That is a small comfort when your credit score drops 100 points.
For more on how auto refinancing affects your credit score before a debt consolidation loan, see refinancing your car loan before a debt consolidation loan: credit score and APR effects.
Closing Observations
Removing a co-signer via personal loan refinance is a math problem. Compare the total interest cost of the personal loan against the value of freeing the co-signer. If the co-signer is a parent helping a child build credit, the higher APR may be a fair trade. If the co-signer is a friend who wants out, the borrower bears the full cost. Check your credit score, shop for the lowest APR, and read the loan terms before signing. The co-signer is off the hook, but you are on it for years.
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