Many people use car loans to purchase a new car. You get a bill each month and have to make a monthly payment to keep your car. If you run into financial trouble, you might have problems making your car payment.

If this happens, you might want to transfer your car loan to someone else as part of selling your car or trading it in for another vehicle. 

Some lenders do give you the option to transfer your car loan to someone else, but it’s important to understand how it will impact your credit.

Does Transferring a Car Loan Affect Credit Score?

In general, transferring a car loan will affect your credit score. Typically, the impact is negative because the lender will note that you did not pay the full balance of your loan and send that information to the credit bureaus.

Your payment history is the most important factor when it comes to determining your credit score, which means that this can cause a significant drop in your credit rating. This could force you to accept worse terms on future loans or make you ineligible for certain loans.

On the other hand, if you would have missed payments on the original loan had you kept it in your name, transferring it can be the lesser of two evils. Keeping the loan could mean adding missed payments to your credit report, late fees, and adding interest to the loan’s balance.

Transferring the loan could mean a smaller impact on your credit in the long run because you won’t rack up multiple late or missed monthly payments.

How a Loan Transfer Impacts You

Transferring a car loan to someone else impacts you in a few ways. On top of impacting your credit score, you have to think about the fees associated with transferring the loan. 

You also need to keep insurance in mind because the person receiving the car loan will need to keep the car insured.

Your Credit Scores Go Down

One of the biggest impacts of transferring a car loan to someone else would be on your credit score.

When you transfer a car loan, the lender will note that you did not pay the balance of the loan in full and place that information on your credit history. 

The credit bureaus will give that information to anyone who pulls a copy of your credit report and it will mean a lower credit score than you previously had.

Because good payment history is the most important part of building good credit, damaging your payment history in this way will hurt your credit a lot.

A car loan transfer also means you won’t have monthly payments to make in the future, thus making it harder to rebuild your credit with consistent payments. It also worsens your credit mix by removing that type of loan from your report.

Your reduced credit score means that you’ll pay a higher interest rate on loans you get in the future and could make it harder to refinance existing loans or qualify for a new loan like a personal loan or auto financing for a new car. 

You can also expect a struggle to qualify for the best credit card deals on the market until your score improves. 

One thing that can mitigate the bad credit implications of transferring a loan is that it will remove some debt from your credit report, which can improve your credit utilization.

Loan Transfer Costs

Transferring a car loan isn’t free. You’ll have to pay fees and other costs associated with moving the loan to someone else’s name.

When you transfer the loan to someone else, your lender will, at minimum, need to put together the paperwork to change the loan and transfer it to the new borrower. This costs time and money, so the lender will make you pay a fee for the service.

In many cases, the lender will make these fees intentionally high to discourage borrowers from transferring their loans. You could be paying hundreds of dollars to transfer the loan.

If you’re working with a car dealership to transfer your loan to a new car buyer, the dealership will expect you to pay any fees charged by the lender. The dealership might also charge additional fees for its assistance in finding a new buyer.

Insurance Premium Transfer Costs

When you buy a car, you’ll likely purchase insurance for it. Most states require that drivers have a minimum amount of insurance before they drive and many lenders also demand that borrowers insure their cars, just in case they get into an accident.

If you transfer your car loan to someone else, you’ll need to let your insurer know that someone else is taking over the loan.

Your insurer should be able to transfer your policy to the new owner, but you’ll have to pay a fee as part of the insurance transfer process.

On top of paying the cost of transferring the policy, keep in mind that it can be very time-consuming. 

You, and the new owner, will have to fill out a lot of paperwork. It can take as long as a month to complete the process, adding headaches to the already difficult process of transferring the loan. 

Seller Requirements for the Transfer of Loans

When you’re selling your car and transferring your loan to someone else, you’ll want to make sure that any potential buyer can qualify for the loan. If your lender doesn’t think the buyer has a good credit score, they won’t let you complete the sale.

Excellent Credit Score

One of the most important things a seller can look for when transferring a car loan is a buyer with excellent credit. The better the buyer’s credit score, the higher the chance that your lender, whether it’s a credit union, bank, or major auto loan provider, will approve of the loan transfer.

So, what is a good credit score to buy a car? While there are no hard minimums, you’ll want a score of at least 781 to qualify for the best rates and make it easy to transfer the loan.

Building good credit means timely credit card payments, low credit card debt, a good credit mix that might include a student loan, mortgage, and multiple revolving credit accounts from multiple lenders.

Someone with good credit should have many loan options available and your lender will have no trouble believing that they can take over your current loan and the associated loan payment.

Another important factor for having good credit is to have a good credit utilization ratio. The more available credit you have across your credit card accounts and the less debt you have, the better your credit score will be. 

Your buyer should have as little debt as possible to make sure they can qualify for the loan transfer.

The financial institution managing your loan will also look to see if the new borrower has a recent credit inquiry on their report or any other red flags that could indicate financial distress.

All-in-all, sellers looking to transfer a loan should make sure any potential buyer has great credit to make sure the process goes smoothly.

High Income

Anyone looking to qualify for an auto loan, or any other type of financing, needs to have the income to afford the monthly payment on their auto loan.

If you’re selling your car and plan to transfer your auto loan to someone else, make sure that they have a high income. 

In particular, make sure that they have a good income compared to the monthly payment on the auto loan and any other loans they have, like a home loan or other installment loan.

Lenders typically don’t want to lend money to people who have a lot of debt in comparison to their income. If someone is barely making ends meet, one financial emergency could leave them unable to pay their debts.

It’s important to keep in mind that income doesn’t show up on a person’s credit history. Having a high income is just one part of qualifying for auto loan financing so a potential buyer will need to have both good credit and enough income to afford the loan amount.

Long History With Current Employer

Another factor that lenders look at when you’re looking to get an auto loan or transfer an auto loan to someone is employment history. 

Car loans typically have a loan term of multiple years, so someone who has an unstable work history might not be able to hold down the same job through the full loan term.

Someone who has a long history with their current employer appears more stable to lenders, making them more willing to let you transfer your auto loan to that person.

The easiest way to prove a potential buyer’s employment history is to ask them to provide copies of paychecks over a period, such as the past three months or past six months. 

This will also let you check their income, which is another important factor in whether your lender will let you transfer your auto loan to them.

Your lender will also want to do their due diligence and may call the buyer’s company to confirm their employment status and history.

If a potential buyer can show off their stability by showing they’ve stuck with their employer for the long haul, it will be easier to transfer your auto loan to them.

Been Living at Current Residence for More Than a Year

Another thing that shows a potential buyer’s stability is how long they’ve stayed at their current residence.

People who move around a lot tend to have less stable lifestyles. That can mean more frequent job changes, trouble maintaining a sufficient income, and more difficulty in paying the bills.

Lenders want to make sure that anyone you transfer your auto loan to will be able to make their monthly payments, so they want you to find a stable buyer who won’t be a default risk.

Another reason that lenders look to someone’s housing history is that it can be difficult to track people down if they move frequently. 

If someone assumes your car loan, moves, and then defaults on the loan, it will take more effort for your lender to track them down to demand payment. It can increase the odds that the lender will have to write off the loan, thus increasing the lender’s risk.

When you’re looking to transfer your auto loan, your lender will probably want to get some proof of the buyer’s residency. This can mean showing copies of utility bills or a copy of their lease.

Is It Good to Transfer a Car Loan?

Transferring a car loan typically isn’t a good thing, but it can be the lesser of two evils in many situations.

If you’re transferring your auto loan, you’re probably facing financial difficulties that are making it difficult to make your monthly loan payments. It’s rare to transfer an auto loan by choice because you want to buy a new car or simply give the car to someone else.

Transferring your car loan will impact your credit negatively, which isn’t a good thing, especially if you want to qualify for other loans. You might find yourself having to lease a car with bad credit until you can improve your credit score enough to get a car loan for a cheaper vehicle.

On the other hand, transferring your auto loan means you won’t miss multiple loan payments or get hit with huge fees for missed payments and large amounts of accrued interest. 

If the alternative to transferring your loan is missing payments, sending the loan to collections, and having the car repossessed, transferring the loan is a good idea.

Conclusion

Transferring your car loan is one way to get out of a bad debt that you can’t afford to pay. Just make sure you understand how it will impact your credit score and finances going forward.

If you’ve damaged your credit by transferring a car loan or missing loan payments, you need to take steps to rebuild your credit. A credit builder loan from Credit Strong is one tool that you can use to help you save money and build credit.

CreditStrong helps improve your credit and can positively impact the factors that determine 90% of your FICO score.

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