How to sell a car with an outstanding loan

By Mozo ·

So you're thinking of selling your car. Whether you're upgrading, giving yourself a little cash injection or just feel like going car-free, if your current vehicle has an outstanding loan, there are a few things you need to know. 

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 will also tell you what the closing balance 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 balance owed 

Find out how much is owed on your car loan. Let say you pay $1200 per month on repayments, which means you pay a little over $14K a year. This brings the balance to a total of $28,800 for the two years that remain, with no more to pay considering you opted for the larger amount and not the balloon option. 

So, if you feel confident that you can sell your car at at least $28,800 then you’re winning. 

But how can you determine how much your car could sell for? 

Well, before you list your car, do your research on 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. You may even profit a tiny bit too.

Also remember to check if your lender will allow you to pay off your loan early and if you need to pay an early repayment fee. This is something you may want to factor into the price before you sell your car. 

If you have a residual bubble 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. There’s more where that came from. We cover more about car loans on Mozo

Option 2 : Upgrading with a dealer 

If you’re salivating over a new car and your dealer wants to make their daily budget, they will think long and hard about how they can convert you from browser to buyer. All they have to do is offer you the right trade-in amount to cover your outstanding loan. 

Just be completely transparent about how much you owe so that they can cover you properly. After all, if your car is less than 5 years old then it makes for a safe resell where they should be able to make a profit. And don’t worry, the dealer usually arranges payment and pays your debt direct to your lender. No sweat. 

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 while offering a hassle-free experience for you and the buyer. You could:

  • Take out a personal loan with a rate that’s lower than you’re currently paying 
  • Use your credit card, preferably with a lower rate than what you’re paying now
  • Utilise your savings 
  • Use equity in your home

Although these scenarios are not exactly ideal, 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. The secret is not to drive yourself deeper into debt, so control any unnecessary spending sprees where you can. 

Outstanding loan frequently asked questions and answers 

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

Unencumbered you say? Cool. This means that you did not use your vehicle as security on your car loan or your house mortgage to pay for it, and may have paid for your car with either a credit card or unsecured personal loan.

In that case, this page isn’t for you. You’re doing alright, and you’re going to find less hitches in selling your car. 

Encumbered on the other hand, is just a fancy way of saying you don’t really own your vehicle outright. Instead, technically the financier does and in order for you to sell you’re going to have to come up with the goods to pay off your car debt before you even consider selling your vehicle. 

  • 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. 

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

There are strictly no spending sprees allowed! No matter how tempting or how much you think you'l  ‘pay it back’. After all, you’re number one aim is to clear yourself of debt not drag yourself in deeper. 

  • What paperwork will I need? 

Before you get all pen-happy and sign over your car, you need to check with your lender that: 

1. It’s ok to sell your car in the first instance 

2. 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 rego 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. 

Tip 101: Keep it clean

You know what we mean. If you want a better chance at selling your car, you’re going to need to take it to the car wash. If you don’t want to spend money on getting it professionally cleaned, then spend time on it in making it sparkle with the garden hose and your vacuum cleaner. A clean car adds value and shine to your car and can easily influence an eager eye.

Selling to upgrade? If you're on the hunt for a more competitive car loan to fund your next car purchase, check out some options below! 

Car Loan Comparison Table - last updated December 04, 2020

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