Ask the Expert: Inheriting a car loan

Figuring out a car loan can be confusing at the best of times, let alone during a time of big change like the death of a loved one. Financial expert Mubina walks us and our reader, Seth, through all the things to consider when taking over the car of a loved one that’s passed away.

The question

My car was on its last legs, so after my Dad passed away, I started using his old car and took over the payments. At the time, the interest rate was 7.5%. I was confused at one point to see that the interest rate had dropped to 0%. I didn’t think that much of it at that point though, and just kept paying. More recently, I decided it was time to change the title of the car over to my name. I called the lender, and they said that in order to change over the title, I would need to pay off the last $5,000. So many questions around this…
Is it normal that an interest rate would drop like that?
In order to pay this off, I would need to get a loan.
Would it make sense to do that, since that would mean taking on interest? While interest isn’t ideal, I wouldn’t be opposed to getting a loan that cuts down my payment a bit. Is that such a bad idea?
Is there any reason why it wouldn’t be okay just to leave the title?
Thanks for your insights,
Seth O.

The answer

Hi Seth,

I understand you’re navigating a complex situation involving your father’s vehicle and the associated auto loan. Let’s break down your questions from a legal and financial perspective.

To begin with, it is normal for auto loan financing rates to drop dramatically, even to 0%, under certain circumstances. Several factors can cause this:

Promotional Financing

Car dealerships and financial institutions frequently offer 0% financing deals as promotional incentives. This is particularly true for new car finance purchases and buying a car. These zero-percent offers are marketing tools used by car dealers and manufacturers to boost sales during specific periods.

Bank of Canada Interest Rate Changes

The Bank of Canada has cut interest rates quite a bit since last year. When the central bank reduces rates, it often leads to reductions in consumer lending rates, including car loan rates.

Estate-Related Modifications

In cases involving inheritance, some lenders may temporarily adjust loan terms or interest rates during the transition period. This is especially true in cases where there are questions about loan assumption or title transfer.

Credit Improvements

If your credit score improved significantly since the original loan, or if the lender reviewed the account, they might have offered you better terms.

Given that you took over payments, the lender may have modified the loan terms as part of the inheritance process. This could explain the interest rate change. However, best to check in on this with the lender.

Getting a loan to pay off the remaining balance

Taking out a personal loan to pay the remaining $5,000 and complete the title transfer can make financial sense. By paying off early, you will obtain a clear title to the vehicle, the monthly car payments will come to an end, and you’re free to sell or trade the vehicle. Plus, there are no restrictions from the lender either. Since you would like to get a loan to pay off the remaining $5,000, here’s what you should keep in mind:

The current interest rates on personal loans in Canada range from 6-12%. This is the range usually offered to borrowers with good credit. A good credit history would depend on the lines of credit you’ve taken, how disciplined you have been in servicing them, among other things. Credit bureaus compile this data, which is used by financial institutions to decide whether to approve your loan application or not, and if approved, at what rate.

The loan term could be shorter, which could potentially reduce the interest expense.
Monthly payments might end up being lower than your current vehicle loan payment.
You’ll have the flexibility to choose your loan payment structure.

You could also consider a personal line of credit if you have access to that facility with your financial institution. It might offer more flexible repayment terms and potentially lower interest rates than a traditional personal loan. Line of credit interest rates in Canada are typically tied to the prime rate and can be more competitive than fixed-rate loans, seeing as the Bank of Canada has been keeping interest rates on the lower side.

Should you leave the title as is?

There are several important reasons why you should consider transferring the title to your name. Firstly, the vehicle legally belongs to your father’s estate. This may create complications if and when you need to sell the vehicle. You may not be able to get proper insurance coverage or make insurance claims should there be any vehicle damage. Provincial vehicle registration laws may require proper title transfer. However, each province and territory has its own rules for transferring the title of a car if the owner dies.

In Ontario, for example, you’ll need specific documentation, including the death certificate, will, and proper transfer forms through ServiceOntario. Other provinces have similar but varying requirements. A title to the auto allows you to use the vehicle as collateral for other financing and also clears any obligations from your father’s estate. Should there be any issues with the estate, the current financier could potentially seize the vehicle.

Here’s what you should do

Contact the lender: Check on why the interest rate dropped and confirm the exact requirements for title transfer.

Shop for financing: Compare rates from multiple sources like your bank, a credit union, line of credit providers and even online lenders.

Compare costs: Compare the cost of getting a loan (interest + fees) versus continuing with the current car loan. The average car loan rate for Canadians is around 7.59%, according to Statistics Canada, while the average interest rate for car loans in Canada ranges from 3.5% to 7.5% for new vehicle financing and 4.5% to 10% for used cars. This can help you evaluate whether any loan offer you receive is competitive and whether you should even consider making the one-shot payment.

Consider your credit: If you have good credit, you should qualify for competitive rates on a personal loan or line of credit.

Review provincial requirements: Ensure you understand your province’s specific requirements for vehicle title transfers after death.

Given the complexity of dealing with inherited vehicles and auto financing, I recommend consulting with your provincial motor vehicle authority for title transfer requirements, a financial advisor to review your loan options and the estate lawyer who handled your father’s affairs, if applicable.

The key is to secure proper legal ownership while minimizing your financing costs. Taking out a loan to pay off the remaining balance and transfer the title is often the cleanest solution, especially if you can secure favourable loan rates.

Remember that vehicle financing and title transfers can have implications for your credit history and credit score, so ensure all payments are made on time regardless of which option you choose.