How to sell a car with an outstanding loan

selling financed car with outstanding loan handing over keys

Thinking of selling your car?

Whether you're upgrading or feel like going car-free, if you bought your car with a secured loan, it isn't always quite as simple as 1-2-3.

An important thing to keep in mind is that when you owe money on your car loan, until you pay it off in full, the lender technically owns your car.

So what happens when you want to sell it? Well, you’ll need to give your lender a call and let them know what your selling intentions are (whether it’s through a private sale or through a dealer). They need to give you the thumbs up before you can go through with any sale. They will also tell you what the closing balance of your loan is, as well as how they’d like you to finalise the loan. 

Now let’s take a deep dive into the options you have when it comes to selling your car with an outstanding debt. 

Option 1 : Selling your car to pay the outstanding balance

Find out how much is owed on your car loan. Let say your monthly repayments are $1200, which means you pay about $14,400 a year. If you have two years left on that loan, that's roughly $28,800 outstanding on your loan. 

If you feel confident that you can sell your car for at least $28,800, then you're good to go.

To make sure your car can sell for the amount left on your loan, do your research. Familiarise yourself with your car’s make, year and model, and if it’s selling for $6-10,000 more than what you owe, list it at that. Placing a higher price tag allows for bargaining room and making your buyer feel like they’re snapping up a real treat. If you can have some spare change after paying back the remainder of your loan, we're all in favour of a little extra cash.

Note: Check if your lender will allow you to pay off your loan early and if there is an early repayment fee.

If you're going to have to hand over a hefty fee for paying your loan early, is something you may want to factor into the price before you sell your car. 

If you have a residual balloon payment in your new car loan or used car loan contract, then you’ll need to call your lender and ask what the break-contract price will be. 

Option 2 : Upgrading with a dealer 

Looking to upgrade your wheels? If your dealer is looking to meet their target, they might also be interested. If they offer you a trade-in amount that covers your outstanding loan, you could find yourself with a sweet new ride.

Make sure you are completely transparent about how much you owe so that they can cover you properly. In the current market, used cars are going for sky-high prices, so be sure you have some idea of what your car is worth.

The dealer usually arranges payment and pays your debt direct to your lender, so all you have to worry about is making sure your loan is paid off and driving off into the sunset.

Option 3 : Paying off your car loan before selling it 

If you absolutely must sell your car before your car loan is up, have you thought about finalising the debt yourself before selling it? It might make for an easier transaction for both you and the buyer. You could:

  • Take out a personal loan with a rate that’s lower than you’re currently paying
  • Use equity in your home

The aim is to minimise debt, so if you line your credit right and repay your loan with a lower credit rate than you’re currently paying then you’re going to come on top. 

Selling a financed car FAQs

I think my car is unencumbered. What does that mean again?

Unencumbered? Excellent! This means that you did not use your vehicle as security on your car loan or your  mortgage, and may have paid for your car with a credit card or unsecured personal loan.

In that case, this page isn’t for you. Sell your car!

Encumbered on the other hand, is just a fancy way of saying your vehicle has some strings attached - it's not fully yours yet. Instead, the financier does, and in order for you to sell you’re going to have to pay off your car debt before you consider selling your vehicle.

Is it legal to sell a financed car?

Even though you aren't technically the owner of a car with an outstanding loan, it's absolutely legal to sell it - provided the financier of your loan has approved of the sale. 

If you used something else as security for your car loan - valuable jewellery or art - or used an unsecured loan to purchase your car, you are free to sell it as long as you continue paying off the remaining loan.

I sold my car. What should I do with the money?

If you sell your car privately, it’s super important to transfer the funds to your lender the very next business day in order to pay off what's owing.

Ask the buyer to place a deposit with you and transfer the funds electronically, direct to your lender’s account so that it’s one smooth transaction, and safe for everyone. Handling large sums of cash multiple times is not ideal!

The number one aim here is to clear yourself of debt, so ensure all parts of your loan are cleared - including any early repayment fees or balloon payments. Make sure any extra is set aside for a while, in case any unexpected fees come out of the woodwork!

What paperwork will I need to sell a financed car?

Before you get ahead of yourself and sign over your car, you need to check with your lender that: 

  • It’s ok to sell your car in the first place
  • You know what the final payout amount is

If you’re selling privately, then you will need to ask how long it takes to process the payment and settle the loan after paying it off in full.

Only then should you arrange to meet with your buyer and hand over the keys to their new set of wheels. Remember to hand over the signed registration papers so they can begin the transferring of the name and ownership of the vehicle, freeing you of further responsibility from the vehicle. 

If you’re trading-in at a dealership then they will deal with everything from paying your lender off to sorting out the paperwork on your behalf as well.

What is a balloon payment and why is it important to remember?

A balloon payment is a lump sum payment at the end of your car loan. Not all loans include a balloon payment, but you should know if yours does as these can be hefty - up to 50% of the car's purchase price.

The balloon payment reduces your monthly car repayment, with that money then paid in the final lump sum. 

Example: You buy a car for $40,000 on a 5 year loan with a 4.67% p.a. interest rate. Without a balloon payment, your monthly repayments cost $748.82. If you and your lender agree on a 25% balloon payment, you are agreeing to take out a loan of $30,000 and pay a lump sum of $10,000 at the end of the loan. This brings your monthly repayments down to $600.53. If you were to sell this car, you would have to factor in the $10,000 still outstanding at the end of your loan. 

When you are looking to sell a financed car, it's easy to forget the balloon payment and any fees for breaking contract or paying off the loan early - make sure to look into these before finalising your decision.

Can I sell a financed car privately?

Provided everything else is in order - you have informed the lender and received approval, you are going to be paying off the remainder of the loan, and you know how they want you to do so, you are absolutely able to sell the car via private sale. 

Read our guide to transferring car registration to familiarise yourself with the process of changing over ownership. Don't hold onto money from the sale - ideally, the buyer is directly transferring the sale price to your lender, paying off your outstanding balance.

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