How do you buy an encumbered car?

What is an encumbered car?

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.

• If the loan is repaid in full, the vehicle is free title and safe to buy.
• If not repaid, the lender can repossess the car, even if you already bought it.

Compare this to cars paid via:

• Unsecured personal loans where the debt follows the borrower, not the car.
• Credit cards or savings there is no lender interest, so the title is clear.

Always verify whether a car has a "clear title" (no finance owing) before agreeing to buy.

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.

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.

How to do a PPSR check before buying a car

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.

• Visit ppsr.gov.au.
• Enter the car's VIN (usually 17 digits).
• Pay the $2 fee.
• Download a PPSR certificate - this is your legal proof of the car's status.

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Frequently Asked Questions

• Is it illegal to sell an encumbered car?

  It is not illegal to sell an encumbered car in Australia, but the seller must disclose that there is finance owing on the vehicle. Failing to do so can result in legal consequences, and the buyer may end up responsible for the debt if it is not settled.

• Is it illegal to sell a car that has finance owing?

  Selling a car with finance owing is legal, but the seller must inform the buyer about the outstanding debt. The buyer may insist that the seller pays off the finance before the sale or arrange for the finance to be settled as part of the sale transaction.

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Written by

Elizabeth Barry

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Elizabeth Barry is an experienced journalist with over 10 years of expertise in personal finance, contributing to outlets like the ABC, Sydney Morning Herald, and 7News. She holds a Master of Arts in Creative Writing and a Bachelor of Arts in Communication from the University of Technology Sydney, and has earned multiple award nominations, including a Highly Commended recognition at the 2017 Lizzies. Elizabeth began her career at Finder in 2013, progressing through roles to become Lead Editor, where she oversaw a wide range of personal finance coverage until 2024. See full bio

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