You are at the end of your rope: you bought a fancy car when you were making lots of money, but six months ago you lost your job and are now way behind on your car loan payments. A relative offers to cover your car payments while you catch up. Or perhaps you have a friend with really terrible credit but good income and a car sitting in their driveway just waiting to get some more use. You want to let him cover the costs of your car payments in exchange for letting him drive the car.
In all of these cases, you may be wondering: can someone take over my car loan?
The Short and Sad of It
The short answer that you are not going to like: No.
“In most cases, car loans are not assumable,” Edmunds.com Senior Consumer Advice Editor Philip Reed told Credit.com. “When the registration and title are transferred to a new owner, the lender needs to be notified. The lender will then step in and require a credit check to make sure the new owner can make the payments. This leads to the initiation of a new loan at the new owner’s credit level.”
Some banks will confirm this, while others might be able to work with the old and new owners to figure something out. In the latter case, the new payer of the car payments, so to speak, would still need to go through all of the hoops as if they were getting the car loan in their own name from the outset.
Letting Them Drive It, Too
It is one thing to let a friend or family member cover your payments for a few months while you get on the right foot — you can probably accomplish this without too much trouble. But what if you’re interested in having someone else behind the wheel of your vehicle as well?
Entrusting your vehicle, and all of the costs and maintenance associated with it, to a stranger is a pretty risky business.
Even if you were to sell your vehicle to the other person instead of simply drawing up an agreement to let them drive the vehicle and cover the payments on the loan, if you have a car loan, you’re not the sole owner of the vehicle: you’ll have to get the permission of your lender before you sell your car. You will still, however, likely come out ahead if you sell the vehicle yourself rather than letting your overdue payments stack up and letting your car get repossessed. Remember: defaulting on your loan or getting your car repossessed is not just a hassle for you and your credit score — it is a hassle for the lender as well who has to chase you down! 99 times out of one hundred, the lender would rather discuss alternative payment options than having to default on your loan.
Can’t You Just Ignore the Bank and Go Rogue?
You could just form a gentlemen's (or gentlewoman’s) agreement with someone and let them drive the car if they’ll agree to regularly pay you and you’ll continue to make the payments on the vehicle with their money. But what happens if they don’t pay up?
In essence, you will be a repo man for your own car, with no force of law to back you up. Depending on your insurance, if the driver is in an accident and they are not listed as one of the authorized driver’s on your policy, you could be out for a ton of money if they are in a bad accident. You’ll also be responsible for any unpaid parking tickets and tolls that they may rack up in your vehicle.
How to Sign Over Your Loan to Another Person, the Proper Way
If you decide to go ahead with your plan to have someone else take over your auto loan, there are several steps you must take:
Read the Fine Print of the Loan
It’s important to be armed with the facts before you ever sit across the table from a formidable banker or loan advisor. Read your loan agreement. Read it again. Perhaps consult a trusted legal advisor who specializes in contract law. It may be easier in most cases to sell your car or trade it in for a cheaper vehicle and adjust the loan to a manageable payment size.
Find Out the Potential New Lessee’s Credit Score
It is crucial that you know what you are working with before you contact your financial institution. A credit score is the most crucial factor that financial institutions use to determine someone’s financial risk and creditworthiness for a good reason — this is the best tool at their disposal to figure out the chances they’ll ever get the money they loaned the other person back. If the new potential lessee has bad credit, it’s going to be a tough sell to your bank.
Contact Your Lender
The person whose name is currently on the car loan needs to contact their bank or other financial institution before anything else can happen. Ask about the policies on auto loan transfers. This is the step at which most banks will tell you it’s against your contract to do so. If this is the case, ask about refinancing the auto loan in the interested party’s name.
Wait for Loan Approval
If you are incredibly lucky, your bank or other lenders will let you apply for loan approval. This could take anywhere from a few minutes while you wait in the office to a few weeks.
If the loan takeover is approved, you can proceed with next steps. If not, you’re back to square one.
Sign the Papers!
If your loan takeover agreement is approved, you will have to sign many a document. This will include forms to sign over the lien and the car’s title in most cases. You will also need to remove the vehicle from your own auto insurance policy. You may need to contact the DMV for assistance with title and registration transfer policies. The new owner of the car will need to take out car insurance based on their own state requirements.
Frequently Asked Questions (FAQs)
Who would want to take over my car payments?
You may struggle to find someone to take over your car payments, especially if you bought the car new. Cars lose value rapidly once they're driven off the lot. If you have a significant amount of your loan left, then it may not make financial sense for someone to take it over. On the other hand, if the amount of the loan is less than or equal to the resale value, then you will have an easier time finding someone to take over the loan.
What do you do with insurance if you let someone take over your car payments?
If the car is still registered in your name and you still drive the car after someone starts making payments for you, then you are responsible for keeping that car insured. If you want to cancel your insurance, then you need to fully transfer the car over to the other person—not just the payments.