If you can’t make your car payments, can you just find someone who can? Credit.com blog reader Carlos asks:
It sounds like Carlos is hoping is that someone will officially take over his payments and assume his loan. But that may not be possible. “In most cases, car loans are not assumable,” says Edmunds.com Senior Consumer Advice Editor Philip Reed. “When the registration and title are transferred to a new owner, the lender needs to be notified. The lender will then step in and require a credit check to make sure the new owner can make the payments. This leads to the initiation of a new loan at the new owner’s credit level.”
Policies with regard to auto loan assumptions vary by lender. A representative from Wells Fargo said its car loans are not assumable, while a representative from Ally Financial said that it will “work with a customer to determine whether an assumption is an option for them. If the assumption is allowed, the person taking on the finance contract would need to fill out an application to see if they qualify to assume the responsibility of the vehicle and payments.” (Of course, someone who qualifies to assume a car loan can shop for a car and not worry about taking over someone else’s payments.)
That doesn’t mean Carlos couldn’t let someone else drive his car and make payments to him, so he can make the payments to his lender. But that can be risky.
If the person who is driving the car doesn’t pay on time, Carlos will have to try to get the car back; in a sense, he will be repossessing his own vehicle. And anyone who has repo’d cars for a living knows how challenging that can be. In the meantime, he could fall behind on his car loan if he isn’t receiving the funds he needs to make the payments each month. (Here’s a guide that explains what to do if you can’t make your car payments.)
Another concern is that the new driver could put a lot of miles and/or wear and tear on the vehicle. And that, in turn, could make it more difficult for him to sell it in the future.
And then there is the issue of insurance. Carlos would have to make sure the car remains fully insured while registered under his name. One way to do that would be to keep his insurance and add the new driver to his insurance policy. But “if the additional driver has a poor driving history or is young, the rate is likely to increase,” warns Laura Adams, senior insurance analyst for insuranceQuotes.com. Not all insurers will cover an unrelated driver living at a different address, so drivers attempting to do this should check with their own insurance company and shop around first.
Another option would be for the new driver to get insurance and add Carlos on “as an additional insured, so he would be notified of any changes,” says Adams, adding that “Some carriers will allow you to insure a vehicle that you don’t own, as long as you have a good reason.” But that’s also risky. One day (and one accident) without insurance could create a huge financial mess — and damaged credit scores — for Carlos.
Guarding His Own Credit
Finally, there’s the risk that the new driver could run up unpaid tolls or parking tickets that may end up in Carlos’ name since he is the registered owner of the car. One of these items could wind up on his credit reports as a collection account, and his credit scores could drop significantly. A recent settlement with the credit reporting agencies and 31 state attorneys general will change how certain fines are reported in the future. Here’s what the credit reporting settlement will do.
If Carlos has a friend or family member he trusts to take over the payments until he gets back on solid financial footing, letting them assume his car payments might work. But relying on a stranger to make payments, insure the vehicle, and take good care of it is fraught with risk. If he decides to move forward anyway, he will want to get the agreement in writing, get a deposit and make sure the car remains fully insured.
Given his precarious financial situation, though, a better strategy might be to talk with a credit counseling agency or bankruptcy attorney to explore his options for getting out of this car loan.