How do you buy an encumbered car?

Found your perfect car, but it's under finance? Find out what you need to know about encumbered vehicles and compare car loans now.

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If you're looking to buy a used car that's still under finance (also called an encumbered car), it's important that you 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 someone purchased with a secured car loan and used as security for that loan. It isn't a bad thing and many cars are encumbered. In fact, 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 cover the cost. 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.

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 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 is secured against the car regardless of who owns the vehicle. If the seller does not pay back the money owed, then the car can still be seized even if it has been bought by someone else. This makes the purchase more complicated than if you were to buy an unencumbered car.

To ensure that you're not taking on a debt-riddled car, 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.

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 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 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.

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

Compare car loans now

Updated August 20th, 2019
Name Product Interest Rate (p.a.) Comparison Rate (p.a.) Min Loan Amount Loan Term Application Fee Monthly Service Fee Monthly Repayment
5.49% (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.
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.
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 p.a.
From 4.99% (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.
From 5.34% (fixed)
1 to 7 years
$459.20 (for private seller vehicles this fee is $608)
Fixed or variable rates starting from 5.34% p.a.
Apply for up to $150,000 and have up to 7 year(s) to repay. You can use cash or trade in a vehicle to use as a deposit.
From 5.69% (fixed)
1 to 7 years
Benefit from 5-hour pre-approval.
A competitive rate car loan from RACV with no monthly fees.
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.
From 5.71% (fixed)
1 to 7 years
$100 (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.
6.79% (fixed)
1 to 7 years
$265 ($175 Establishment Fee + $90 Security Administration Fee)
Finance a new or used vehicle up to 7 years old.
Benefit from additional repayments, no ongoing fees and access to a redraw facility with this competitive loan from CUA.
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.
6.45% (variable)
1 to 7 years
Apply for a loan up to $100,000.
Benefit from a flexible, variable rate to finance a car up to 3 years old with SCU.
From 5.69% (fixed)
1 to 7 years
You'll receive a fixed rate from 5.69% p. a.
Purchase a new car with this loan and benefit from a fixed rate and no monthly fees. Pre-approval available within 5 business hours.
6.69% (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.
From 6.99% (fixed)
1 to 7 years
You'll receive a fixed rate from 6.99% p.a.
Finance a used car with NRMA and benefit from a fixed rate term and no monthly fees. Pre-approval available within 5 business hours.
From 4.79% (fixed)
1 to 7 years
You'll receive a fixed rate of 4.79% p.a. with a comparison rate of 5.34% p.a.
Get access to over 20 providers to fund a new or used car.

Compare up to 4 providers

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