How to Transfer a Car Loan to Another Person

Transferring a car loan to another person involves navigating vehicle ownership changes and associated financial obligations. Individuals explore this process for various reasons, such as selling a vehicle to a family member, managing assets during a divorce, or gifting a car. The goal is to shift financial responsibility for the vehicle from one party to another.

Understanding Direct Loan Transfer

Directly transferring an existing car loan, often called a loan assumption or novation, is uncommon. Lenders structure auto loans based on the original borrower’s creditworthiness, income, and financial assessment at origination. Terms are tied to the initial agreement, making direct transfer challenging. Loan contracts contain clauses that prohibit the original borrower from transferring the loan or vehicle without the lender’s explicit consent. Allowing a direct transfer would mean the lender assumes the risk of a new, unvetted borrower, altering their initial risk assessment. While rare exceptions exist where a lender might consider an assumption, such instances are not widely available and often require the new party to undergo a rigorous qualification process.

Alternative Methods for Vehicle and Loan Transfer

Due to limitations of direct loan transfer, most individuals transfer a vehicle and its associated debt through alternative, more common methods. One method involves selling the vehicle, where the new owner secures financing or pays cash. The funds from this transaction pay off the original loan in full. This extinguishes the original debt, releasing the initial borrower and allowing the new owner to take possession with their own financial arrangement.

Another pathway is for the new borrower to refinance the vehicle. The new party applies for a new car loan, using the vehicle as collateral, and the proceeds pay off the original loan. This transfers the debt to the new borrower based on their credit profile and financial standing.

In situations such as a divorce, a court may order a transfer of vehicle responsibility. Even in these cases, legal liability transfer still requires a financial mechanism like sale or refinancing to remove the original borrower from the loan.

Navigating the Transfer Process

Transferring a car and loan, primarily through selling or refinancing, involves several procedural steps. The original borrower must contact their current lender to understand the payoff process, obtain a payoff quote, and inquire about title release requirements.

If the transfer involves new financing, the new owner must apply for a car loan. This application requires:
Proof of identity
Income verification
Residency
A credit history review

Once new financing or cash payment is secured, the original loan can be paid off. Funds are directed to the existing lender to close the account, ensuring the loan is reported as paid and the lien released.

With the loan satisfied, the vehicle title can be legally transferred. The original owner signs over the title, and the new owner takes it to their state’s Department of Motor Vehicles (DMV). Many states require a lien release from the original lender to issue a new title, and some require notarized signatures on transfer forms. The new owner must register the vehicle and obtain new license plates if required.

Key Considerations for a Smooth Transfer

Several financial, legal, and practical aspects warrant attention for a smooth car and loan transfer. Credit scores of both borrowers can be affected. For the original borrower, paying off the loan results in a closed account, which can cause a temporary, slight dip in their credit score. The new borrower’s credit is impacted by applying for new financing.

Securing car insurance is a crucial step for the new owner, and coverage must be in place before taking possession. Most states require proof of insurance for vehicle registration. The original owner should notify their insurance provider to update or cancel their policy once ownership transfers.

The original borrower maintains liability until the debt is paid off and the title is legally transferred. Failing to ensure formal transfer can leave the original owner responsible for accidents, tickets, or other liabilities. Maintaining documentation is essential for both parties, including:
A bill of sale
The loan payoff letter
The new loan agreement
Title transfer forms

Various fees and taxes are associated with vehicle transfers:
Title transfer fees vary by state, often ranging from $50 to $100, with some states offering reduced fees for family transfers.
Most states levy a sales tax on vehicle purchases, paid by the buyer, with rates generally between 0% and over 8%.
Some states may impose specific vehicle gift taxes, such as a nominal $10 fee for eligible family transfers in some jurisdictions.
New registration and license plate fees apply for the new owner.
Lien recording fees, typically $30-$75, may apply if financing.

Clear communication among all parties, including owners, lenders, and the DMV, ensures a smooth and legally compliant transfer.