If you're looking to buy a used car that's still under finance (also called an encumbered car), you must understand how the buying process works to ensure you don't run into complications down the line.
With an encumbered car, the debt is attached to the vehicle itself, not the owner, so it can cause major problems if you buy a car still under finance.
Read our guide on what to look out for when purchasing an encumbered car and compare your finance options below.
What is an encumbered car?
An encumbered car is simply one that was purchased with a secured car loan with the vehicle held as security for that loan. It isn't necessarily a bad thing; in fact, many cars are financially encumbered. Your own car is considered encumbered if you purchased it with a secured car loan that you haven't completely repaid yet.
Secured car loans are attached to the vehicle. The lender gives the money to the buyer with the condition that if they fail to repay the loan, the lender can take ownership of the vehicle to recoup costs. It is perfectly legal to sell a car that is under finance, but you should always notify the buyer and arrange for the rest of the loan to be paid off before you sell it. As a car buyer, you're legally responsible for verifying whether a privately sold car has a "clear title" (no money owed) or the amount of any outstanding debt tied to it.
Cars purchased with unsecured loans, credit cards or cash are not encumbered because the buyer has paid for the car with their own money or with a loan that they are personally liable for.
What's the issue with buying an encumbered car?
Buying a car that's under finance is essentially the same process as buying a property. The buyer uses cash or a loan to pay the seller, who uses the sale money to pay back their loan. However, unlike property, a secured car loan is linked to the car, not the owner.
The loan is secured against the car regardless of who owns the vehicle. If the seller does not pay back the money owed, the car can still be seized even if it has been bought by someone else.
This makes the purchase slightly more complicated than if you were to buy an unencumbered, or free title, car.
To ensure that you're not taking on a debt-riddled vehicle, you need to take some extra steps to protect yourself. While the seller should notify you if the car is encumbered, you should always ask if a car is under finance before agreeing to buy it.
In a worst-case scenario, if you buy a car with an unsettled loan attached to it, the vehicle can legally be repossessed by the lender on default of repayments.
How do you actually buy a car that's encumbered?
Buying an encumbered car is relatively straightforward and much the same as buying a normal car. There are just a couple of extra steps you'll need to take. These are:
Ask the owner about financing. If the owner is open and honest about how the car is financed, it's a good sign that they are genuine and that the car is worth pursuing further. If they attempt to hide or don't know about any money owing on the car, it's probably worth looking at another vehicle. To be safe, get the seller to request a payout letter be sent from the finance company to you, confirming the balance owed. You could always ask them to pay off the loan, but chances are, if they are selling without having done so already, they need the proceeds from the sale to do so.
Do a PPSR check. The Personal Property Securities Register (PPSR) is a government database of all personal property used as security against a loan. Entering the Vehicle Identification Number (VIN) and registration details, you can get a report on any vehicle in Australia. Ideally, the report should align with what the owner has told you about the vehicle. The online check costs $2 and could save you from losing out financially.
Where's the VIN? Every vehicle has a unique VIN; you'll find it stamped onto a plate under the bonnet, on a chassis rail, on the door jamb or sometimes in a little cut-out at the bottom of the windscreen. The exact location depends on the brand as car manufacturers stamp their VIN numbers in different places. If there are signs the VIN plate has been replaced or tampered with, this would be a cause for concern. If any of the details on the search certificate don't match up, the seller could be running a scam. A vehicle's VIN should correspond with the one printed on the registration certificate. If the car was built before 1989, it may not have a 17-digit VIN and instead have a chassis number. PPSR recommends you carry out the check on the day prior to, or the day of buying the car to make sure nothing has changed since your original search (a dodgy seller could take out a loan in the time between your original search and completing the sale).
Negotiate the sale process. The seller will most likely need your money to pay back their loan, which will end the encumbrance. However, you don't want to hand your money over until the car is finance free. Still, you can't guarantee they won't just take the money and run. The solution is to do it at the same time. This is exactly how real estate is transferred. Finalise the sale in the office of the seller's financing company or bank, so they can pay off the car loan as you give them the money. You could also pay the bank directly, paying the remainder to the car's owner.
Should I buy a car that's financed?
There is nothing wrong with buying a financed car, but you need to take precautions and do a bit of due diligence before committing. The responsibility is on you to ensure that the car doesn't have any outstanding finance, or if it does, to make sure that the seller pays off the loan before you take ownership of the vehicle. If the car is particularly unusual, like a classic car or special edition and you simply must have it, the extra bit of effort will be worth it.
Dealers are obliged to prove that their cars aren't under any sort of financing contract and have much more to lose by misleading buyers. However, private sellers are not subject to the same regulations, so make sure you do the proper checks.
If you find the right car, don't be put off by existing finance. Just make sure everything is out in the open. Be wary of offers that seem too good to be true. And, if you like, use the fact that the car is encumbered to haggle a better deal.
Elizabeth Barry is the lead editor for Finder. She has over 10 years' experience writing about a range of topics with a focus on personal finance. You’ll find her writing and commentary in a range of publications and media including Seven News, the ABC, MSN, the Irish Times and Singapore Business Review.
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