Ask Dr. Don By Don Taylor, Ph.D., CFA • Bankrate.com

Changing my auto loan's terms

Dear Dr. Don,
I am a student that purchased a 2002 automobile with a loan from the manufacturer's finance company, which was co-signed by a family member. At the time of purchase, the loan officer informed us that after making 12 consecutive on-time payments I would be able to have my co-signer removed with no change in my loan agreement.

Now, 12 payments later, the finance company has said that in order to remove my co-signer I would need to enter into a new finance agreement at a much higher interest rate. I'm unsure as to what steps to take next or if what I'm being told is legal in Pennsylvania. I have two years left on the current loan but would like to have only my name on the loan.
Ann Auto

Dear Ann,
It sounds like you're also getting a real education outside of the classroom. If the agreement to have the co-signer removed from the loan after 12 consecutive on-time payments wasn't in writing, you won't have any luck enforcing this oral agreement.

It's great that you were able to afford a new car with a three-year loan. It's also great that you want to accept full responsibility for making the payments.

Talk with your co-signer and ask him or her how important it is to be free of this responsibility. With only two years to go and with your strong payment history, the co-signer may have no problem with the existing loan arrangement.

The finance company's offer to refinance the car at a higher interest rate just reflects the fact that the loan is riskier without your co-signer on board. You may be able to refinance the car from another lender at a better rate than what the finance company is offering you. Shop rates for refinancing your used car on Bankrate.