Can a Financed Vehicle Be Transferred to Another Person?

Transferring a financed vehicle to another person can be a straightforward process, but it involves several steps and considerations. This guide provides detailed information for U.S. residents, focusing particularly on California laws, to help you understand the process and the necessary steps.

California Laws Regarding Auto Loans

It is important to note that California follows specific laws regarding auto loans. Unlike some areas, California law does not impose pre-payment penalties for most auto loans. This means that if someone else pays the difference between the car's value and the remaining loan balance, you can then use that amount to pay off the loan in full without incurring any penalties. However, if you have negative equity, you may need the difference to pay off the loan, which can be challenging.

Steps and Considerations for Transferring a Financed Vehicle

Transferring a financed vehicle typically involves the following steps:

1. Paying Off the Loan

To transfer the vehicle, you need to fully pay off the loan. This can be done in two ways:

Using Cash or Cashier's Check: If you or the other person have the funds, you can use cash or a cashier's check to pay off the remaining loan balance. Once the loan is paid in full, the lender will generally release their lien on the vehicle, and you can then sign over the title to the new owner. Securing a New Loan: If you don't have the funds, you can obtain a new loan to pay off the remaining balance on the current loan. This involves finding a lender who will accept the transfer of the existing loan, known as a Title Transfer of Equity (TOE), and then taking over the loan payments.

2. Getting the Cosigner Off the Loan

If you have a cosigner on the loan, their involvement needs to be addressed. The cosigner can:

Pay Off the Loan: The cosigner can use their funds or cashier's check to pay off the loan. Once the loan is paid in full, the lender will release the lien, and you can sign over the title to the new owner. Secure a New Loan: The cosigner can take out a new loan to pay off the existing one. This is typically more cost-effective as the cosigner is likely to qualify for a lower interest rate due to their better credit score.

It's important to discuss with the cosigner how to handle the equity or negative equity to ensure a smooth transition.

3. Selling the Car with a Transfer of Equity (TOE)

If you wish to sell the car to someone else and they want to take over the remaining loan, some lenders offer a Transfer of Equity (TOE). In this scenario:

The buyer applies for a loan through the lender who will evaluate their creditworthiness. Once approved, the loan is transferred to the new buyer's name. You remain responsible for the payments if the buyer fails to make them.

As a seller, you would typically want to remain in good standing with the lender to ensure a smooth transition.

Risks and Considerations for Lenders

Lenders often have strict criteria when considering transfers of equity, especially if a new borrower is involved:

Uncertain Creditworthiness: The new borrower's credit score must be considered, and it should be higher than the original borrower's to minimize the risk. Loss of a Good Customer: Switching the loan to a new borrower may result in the loss of a customer who has a history of timely payments. Market Value of Collateral: The value of the collateral (the car) is subject to market fluctuations, which can affect the lender's return on investment. Administrative Work: Transferring the loan to a new borrower involves significant paperwork and administrative tasks, which can be time-consuming and costly.

For these reasons, lenders are often hesitant to process such transfers, especially if a new borrower is unknown.

When Transfers Are More Likely to Happen

While lenders generally discourage this process, there are exceptions:

Parent-Sponsored Transfers: It is common for a family member with good credit to take over a child's loan. In this case, the lender might be more willing to process the transfer, as the risk is lower. Economic Considerations: In certain economic situations, when a responsible buyer with good credit is interested in taking over the loan, the lender might be more willing to process the transfer.

Conclusion

Transferring a financed vehicle to another person is possible, but it requires careful planning and consideration. California law provides flexibility, but lenders have their own criteria to adhere to. Understanding the process and the steps involved can help you ensure a smooth transition and minimize risks.