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 November 17th, 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
Latitude New and Used Car Loan
From 6.99% (fixed)
1 to 7 years
Finance a range of vehicles including cars, motorbikes, boats and caravans.
Apply online to finance a new or used motor vehicle and receive a response in 90 seconds. You will receive a competitive tailored rate of between 6.99% p.a. to 14.99% p.a.
Loans.com.au - New Car Loan
5.44% (fixed)
3 to 5 years
Optional balloon payment available to reduce your repayments.
A competitive rate car loan suitable for a new cor used car.
Stratton Finance New Car Loan
From 5.14% (fixed)
1 to 7 years
$457 (for private seller vehicles this fee is $608)
Fixed or variable rates starting from 5.14% p.a.
Apply for up to $100,000 and have up to 7 year(s) to repay. You can use cash or trade in a vehicle to use as a deposit.
Beyond Bank Low Rate Car Loan
From 5.69% (fixed)
1 to 7 years
Offset your interest with a Car Budget Account.
Take advantage of a competitive rate, pre-approval and no early repayment fees when you finance a car under two years old.
IMB New Car Loan
5.89% (fixed)
1 to 7 years
Borrow as little as $2,000 at a competitive fixed rate
Finance a new car up to two years old. Competitive 5.99% p.a. rate available to all approved applicants.
St.George Secured Personal Loan - Fixed Rate
From 8.49% (fixed)
1 to 5 years
You'll receive a fixed rate from 8.49% p.a. based on the value of your car
Get a competitive rate and apply for a larger loan up to $80,000 when you attach a new or used car as security to the loan.
Australian Military Bank Car Loan
From 5.71% (fixed)
1 to 7 years
from $100 to $500
You'll receive a fixed rate between 5.71% p.a. and 8.66% p.a. based on your personal credit history
A flexible loan to help you finance a car, motorbike or boat up to five years old.
Westpac Car Loan
From 8.49% (fixed)
1 to 7 years
Use a new or used car as security.
A flexible loan thats lets you benefit from a car search tool as well as the option to borrow extra for on-road costs.
RACV New Car Loans
From 5.99% (fixed)
1 to 7 years
Benefit from 5-hour pre-approval.
A competitive rate car loan from RACV with no monthly fees.
IMB Secured Personal Loan
6.89% (fixed)
1 to 5 years
Secure this loan with a car and use the funds for any purpose.
Competitive 6.89% p.a. rate available to all approved applicants. Loan amounts up to $60,000 available.
MyState Bank Secured Personal Loan
From 7.99% (variable)
1 to 10 years
Your choice between secured or unsecured.
Apply for a loan up to $75,000 and benefit from loan terms up to 10 years.

Compare up to 4 providers

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Car Loan Offers

Important Information*
Latitude New and Used Car Loan

You'll receive a fixed rate between 6.99% p.a. and 14.99% p.a. based on your risk profile
Apply for a loan from $5,000 to finance a new or used car. Flexible repayments and options to finance a classic car.

Loans.com.au - New Car Loan

You'll receive a fixed rate of 5.44% p.a.
Finance a new car and benefit from features such as fast approval, no ongoing fees and an optional balloon payment.

Stratton Finance New Car Loan

You'll receive a fixed or variable rate depending on the lender you are approved with
Apply for up to $100,000 and use cash or trade in a vehicle to use as a deposit. Optional balloon payment available.

Beyond Bank Low Rate Car Loan "Special Offer"

You'll receive a fixed rate of 5.69% p.a.
Take advantage of a competitive rate, pre-approval and no early repayment fees when you finance a car under two years old.

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