Can I Transfer My Car Loan to the Cosigner?

Individuals often seek to modify car loans, especially when a cosigner is better positioned to assume full responsibility. While directly “transferring” a car loan to a cosigner on an existing agreement seems straightforward, this process is generally not possible. Lenders base loan approvals on a specific credit assessment of all original borrowers, and altering this arrangement requires a new financial undertaking. The cosigner typically achieves sole responsibility by securing a new loan in their name to pay off the original debt.

Understanding Loan Transferability

Car loans are a contractual agreement between the borrower, any cosigners, and the lender. This contract is based on the financial profiles and credit assessments of all parties at the time of the initial application. Lenders evaluate the risk of extending credit, relying on the combined financial strength of the primary borrower and cosigner. Consequently, lenders generally do not permit a direct transfer of liability on an existing loan.

A direct transfer would alter the loan’s risk profile without a new underwriting process. If the primary borrower were removed, the lender’s security would change significantly, as the cosigner’s individual financial standing might not meet original lending criteria. Therefore, for the cosigner to assume sole responsibility, they must qualify for and obtain a new loan. The proceeds from this new loan then pay off the original car loan, closing the initial agreement.

Qualifying for a New Loan

For a cosigner to successfully take over a car loan, they must meet the lender’s standard eligibility requirements as if they were the primary applicant. Lenders evaluate several factors for loan approval and terms. The cosigner’s credit history and score are primary considerations; a good FICO score ranges from 670 to 739, and a good VantageScore from 750 to 850. A higher credit score leads to more favorable interest rates and a greater likelihood of approval.

Lenders also scrutinize the cosigner’s income and employment stability to ensure they can make loan payments independently. Proof of income, such as recent pay stubs, W-2 forms, tax returns, or bank statements, is commonly required. The debt-to-income (DTI) ratio, which compares monthly debt obligations to gross monthly income, is another important metric. Many lenders prefer a DTI below 43% to 50%, with some seeking ratios as low as 36%.

The vehicle itself also plays a role. Lenders consider the car’s current value relative to the outstanding loan amount, known as the loan-to-value (LTV) ratio. A higher LTV indicates greater risk; while some lenders allow LTVs up to 120% to 150%, a lower ratio is preferred and results in better loan terms. Some lenders restrict financing older vehicles, with many banks not financing cars older than 10 years or those with very high mileage. To prepare for an application, the cosigner should gather essential documents:
A valid photo ID
Proof of residence
Proof of insurance
Detailed information about the current loan and vehicle, such as the VIN and mileage

Applying for a New Loan

After assessing eligibility and gathering documentation, the cosigner applies for a new car loan. Research various financial institutions, including banks, credit unions, and online lenders, to compare interest rates and loan terms. Different lenders offer varying rates based on individual credit profiles and the specific vehicle.

Many lenders offer a pre-qualification process, allowing applicants to gauge eligibility and estimated rates with a soft credit inquiry. This preliminary step does not negatively impact the credit score and helps narrow options before a formal application. After identifying suitable lenders, the cosigner submits a formal loan application, ensuring all gathered information is available. This formal application involves a hard credit inquiry, which may temporarily affect the credit score.

Upon receiving loan offers, carefully review proposed interest rates, repayment terms, and any associated fees to select the most advantageous option. Once approved, new loan documents are signed, and funds are disbursed. Ensure the proceeds from the new loan directly pay off the existing car loan in its entirety. This action legally satisfies the original debt, releasing the initial primary borrower from their financial obligation.

Completing the Process

After the cosigner secures a new loan and the original car loan is paid off, several administrative and legal steps finalize the transition. The most significant outcome is the release of the original borrower’s liability. The prior lender should provide written confirmation that the loan has been satisfied and any lien on the vehicle released. This documentation serves as legal proof that the original borrower is no longer financially responsible.

The vehicle’s title must then be transferred to reflect the new sole ownership of the former cosigner. This process involves the state’s Department of Motor Vehicles (DMV) or equivalent agency. Procedures vary by state; some states have the lender send the lien release directly to the DMV, while in others, the owner submits paperwork. This transfer can take several weeks, so follow-up with the DMV and former lender is advisable.

In addition to the title transfer, the car insurance policy requires immediate attention. The policy must be updated to reflect the new lienholder, the lender of the newly acquired loan. The insurance company needs to be informed that the previous lienholder no longer has an insurable interest. This update ensures that in the event of a claim, payouts are correctly directed to the current lender, protecting their investment. Both the original borrower and the now sole borrower should retain thorough records of all transaction documents, including the payoff letter, new loan agreement, and updated title, for future reference.