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.
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.
An encumbered car is one that still has finance owing against it - usually through a secured car loan. This means the lender has a legal interest in the car until the loan is repaid.
It isn't necessarily a bad thing; in fact, many cars are financially encumbered. 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.
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Always verify whether a car has a "clear title" (no finance owing) before agreeing to buy.
Buying an encumbered car isn't illegal - but it comes with higher risks.
Important: If you don't confirm the finance status, you risk inheriting someone else's debt.
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.
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:
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.
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.
Tip: From a dealership, the risk is minimal (they must sell cars with a clear title). From private sellers, always assume there's risk until proven otherwise.
The Personal Property Securities Register (PPSR) is the official government database showing whether a car has money owing, has been written off, or reported stolen.
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