The Wrong Way
There is a wrong way to take over payments on another person’s car loan. If a person asks you to make the payments on their behalf while the car loan remains in their name, a few situations may occur. Here is the downside if considering taking over payments on a car loan:
You make the payments until the vehicle is paid in full while the title remains in your friend’s name and shows the lender as the lien holder. These payments will include the loan balance, fees, and add-on such as GAP Insurance. Once the vehicle is paid off, the lender will release the title to your friend or relative and you have no legal rights to the vehicle, no matter what was promised.
You give the monthly payment to your friend each month with the understanding they will use it to make car payments and in turn, they are only using your money for other expenses and no payments are made toward the balance on the vehicle. In this case, most likely the lender will repossess the vehicle and you still have no legal rights to the vehicle.
The car owner does use your money to make the monthly payments, however, once paid off, because neither the loan or the title are in your name, even if they give you the car, you can’t register or insure it if they don’t turn the title over to you.
All of these examples are the wrong way and don’t consider your legal rights to the car and should be avoided.
Image Credit: Bad Credit Car Loan by Kerembeu21/Flickr Creative Commons
Make It Legal
There are two scenarios where you can take over car payments for a friend or relative and both of these will ensure you have legal right to own the vehicle once it is paid off.
Add Your Name to the Loan – Some banks, credit unions, and auto lenders will allow you to add your name to the loan, but not all. Go with your friend to the lender and ask if they allow this. If the lender agrees, a loan modification will be needed and the bank or lender will run your credit report and obtain your credit score to make sure you are qualified to be a co-signer on the loan. In addition, after the loan modification, a new title will be issued showing your friend’s name, your name, and the lender or lien holder’s name. Once the vehicle is paid in full, you will have as much right to the vehicle as your friend does. The downside to this is because most lenders require co-signed car titles to be listed as your friend’s name “and” your name, you are essentially both sharing the car unless your friend signs the title over to you through a bill of sale. Most motor vehicle departments offer free bill of sale forms. A motor vehicle bill of sale form sample can be found in our Media Gallery.
Get a New Car Loan – In this instance you and your friend visit the bank or lender and if they allow this situation, a new loan will be issued in only your name, freeing the original owner from responsibility. If you do this, remember, the amount of your loan will include the full balance due even if the vehicle is upside down in value, plus any late fees or loan origination and titling fees. Your interest rate may not be the same; it may be higher or lower based on your credit score. Once the new loan is issued in your name only, a new title will be issued showing your name and the bank, credit union or lender as the lien holder. In this case, your friend or relative will have no legal rights to the vehicle once it is paid in full and the vehicle will be safely yours.
Use Caution and Common Sense
If someone you know is asking you if you would be willing to assist them by taking over payments on a car loan, use caution and common sense. To be safe, the best way is to acquire an entirely new auto loan in your name only. To avoid legal issues or arguments about who truly owns the car, err on the side of caution.
This post is part of the series: Should You Co-Sign on a Car Loan
Making a decision to co-sign on a car loan is a serious matter. Other considerations include how to take over payments on a co-signed car loan. Finally, when purchasing a car do you know the actual dealer cost? This series answers these questions.