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How do you buy an encumbered car?

Found your perfect car, but it’s under finance? Don’t worry, buying an encumbered car is fine if the seller is upfront and you take the right measures.

There are many things to consider and check when buying a car. Without due diligence, you can end up with more of a liability than an asset. Beyond all the standard mechanical things you need to check, you also need to make sure that the owner didn’t purchase the car with borrowed money. If it was, there may be debts on the vehicle.

As the debt is attached to the car, not the owner, it can cause major problems if you buy a car still under finance. Here’s a guide on what to look out for when purchasing an encumbered car.

What is an encumbered car?

An encumbered car is simply one that someone used as security for a loan. It isn’t a bad thing and many cars are encumbered. In fact, your own car may be 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 financing company loans money to the buyer with the condition that if they ever want their money back, and they aren’t getting it, they can sell the car and take the money.

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 liable for.

Why is it difficult to purchase a car that’s financed?

Buying an encumbered car is essentially the same process most people use to buy 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 attached to the car, not the owner.

The loan stays secured by the car regardless of who owns it. If the seller does not pay back the money owed, then the buyer could be in for a nasty surprise.

To ensure that you’re not taking on a debt-riddled car, you need to take some extra steps to protect yourself. This makes the sale less straight forward than a pure cash transaction.

How do you actually buy a car that’s encumbered?

Creating an open, honest environment is key to buying an encumbered car. Here are some steps to take before buying an encumbered car:

  • Ask the owner about financing. If the owner is open and honest about how the car is financed, it is a good sign that they are genuine and 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 moving on.
  • Do a PPRS check. The Personal Property Securities Register (PPRS) is a government database of all personal property used as security against a loan. With the vehicle number 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.
  • 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. 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 so they can pay out the car loan as you give them the money.

Should I buy a car that’s financed?

There is nothing wrong with buying a financed car, but you need to take care and do a bit of due diligence before committing. The responsibility is on you to ensure the car doesn’t have any outstanding finance.

Dealers are obliged to prove 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. However, you can also use the fact that the car is encumbered to negotiate a discount.

Compare a range of car finance options

Rates last updated February 22nd, 2018
$
Name Product Interest Rate (p.a.) Comparison Rate (p.a.) Min Loan Amount Loan Term Monthly Service Fee Application Fee Product Description Monthly Repayment
IMB New Car Loan
From 5.99% (fixed)
6.34%
$2,000
1 to 7 years
$0
$250
Borrow up to $75,000 for a new car up to two years old. Competitive 5.99% p.a. rate available to all approved applicants.
Beyond Bank Low Rate Car Loan
From 5.69% (fixed)
5.97%
$25,000
1 to 7 years
$0
$175
A great rate for cars under 2 years old.
Stratton Finance New Car Loan
From 5.49% (fixed)
6.62%
$18,000
1 to 10 years
$7
$499
Benefit from a car broker with over 25 years experience
bcu Special Car Loan
5.9% (variable)
6.82%
$5,000
1 to 5 years
$8
$250
Benefit from a competitive rate when you take out a bcu Access Account.
RACV New Car Loans
From 6.49% (fixed)
7.03%
$15,000
1 to 7 years
$0
$380
A competitive rate car loan from RACV with no monthly fees and 5-hour loan approval.
NRMA New Car Loan
From 6.49% (fixed)
7.03%
$15,000
1 to 7 years
$0
$380
Purchase a new car with an NRMA Car Loan with a fixed rate term and no monthly fees. Pre-approval available within 5 business hours.
Latitude Car Loan
From 6.99% (fixed)
8.1%
$5,000
1 to 7 years
$10
$295
A secured loan with a competitive rate that can help you finance a range of new or used vehicles.
Heritage Bank Car Loan
From 8.99% (fixed)
9.62%
$5,000
1 to 7 years
$5
$200
Apply for up to $100,000 to finance a new or used car at a competitive fixed rate.
IMB Secured Personal Loan
From 6.89% (fixed)
7.24%
$2,000
1 to 5 years
$0
$250
All approved applicants can access this competitive rate and use the loan to finance a range of purposes. Loan amounts up to $60,000 available.
RACV Personal Loan
From 7.49% (fixed)
8.04%
$5,000
1 to 7 years
$0
$380
Take advantage of a competitive rate by securing an asset to this loan. Use the funds for any purpose.
AutoCarLoans
From 5.16% (fixed)
6.64%
$15,000
1 to 7 years
$5
$381.80
AutoCarLoans can match you with a lender from its panel with rates starting from 5.16% p.a. Suitable for vehicles up to 2 years old.
MyState Secured Personal Loan
From 7.99% (variable)
8.96%
$10,000
1 to 10 years
$10
$200
Apply for a loan up to $75,000 and benefit from loan terms up to 10 years. Your choice between secured or unsecured.
Freedom Finance Car Loan
From 5.1% (fixed)
5.94%
$35,000
1 to 5 years
$0
$380
If you meet all the requirements you could get access to a range of lenders to finance a new or used car up to 4 years.
Latitude Personal Loan (Secured)
From 12.99% (fixed)
14.2%
$3,000
2 to 7 years
$13
$250 (Loans under $4000 - $140)
Benefit from a tailored fixed rate with a loan that can be used for any purpose.
Westpac Car Loan
From 8.49% (fixed)
9.67%
$10,000
1 to 7 years
$12
$250
Finance a new or used car and benefit from great features for car buyers including a car search tool and the option to borrow extra for on-road costs.

Compare up to 4 providers

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Car Loan Offers

Important Information*
IMB New Car Loan

Borrow up to $75,000 for a new car up to two years old. Competitive 5.99% p.a. rate available to all approved applicants.

Beyond Bank Low Rate Car Loan "Special Offer"

A great rate for cars under 2 years old.

RACV New Car Loans

A competitive rate car loan from RACV with no monthly fees and 5-hour loan approval.

Heritage Bank Car Loan

Apply for up to $100,000 to finance a new or used car at a competitive fixed rate.

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