Looking to sell your car and pay off the finance? Here’s what you need to know.
There’s no real secret to getting the best price when selling your old car, other than having a great car and a good buyer. There are, however, a lot of things that can be problematic. Having outstanding finance owing on the car you’re trying to sell is one of them. This guide will take you through how to sell an encumbered vehicle.
Can you sell a car that is under finance?
Yes, you can sell a car that is under finance. However, there are two big problems that you need to get around:
- Most people simply don’t want to buy a car with finance owing on it. It’s hard to find a buyer, and much harder to get a good price.
- Sometimes you must pay off the loan in full before you are allowed to sell the car.
As you can see, solving the second problem also solves the first, so that’s usually the best option.
What do I need to know before I sell my encumbered car?
If you want to sell a car under finance, answering the questions below should help you decide what your options are.
- How much is still owing on the car? You need to know how much still needs to be paid back on the loan.
- How will you pay back the lender? You need to keep the lender happy by paying them back the entire car loan in full, plus any early repayment fees and other costs. Before deciding to sell your financed car, discuss it with your lender.
- How will you satisfy the buyer? Some people may be hesitant to purchase an encumbered car. You either need to make it very clear that any outstanding debt will be the buyer’s responsibility, or that any outstanding finance will be paid off by you.
- Is the car collateral? If the car is being used as collateral in a secured loan, then you can’t sell it until the loan is completely paid off. If it’s not, then you can sell the car but you are required to disclose any outstanding financing on it.
Trying to sell a car you don't own
If you have a secured car loan with the car as collateral then you can’t sell it until the loan is paid off. What if you can’t pay off the loan without selling the car, but can’t sell the car without paying off the loan?
Polish your smile and brush up your sales skills, because you need the buyer to trust you. Your options are:
- Be a sales superstar, and sell the car even with outstanding finance. This is tough, and most buyers simply won’t do it because it’s an unwanted cost, it carries extra hassles and it can put them in a vulnerable position.
- Explain the situation to them. The car is still under finance and they will be purchasing a car under finance. However, you plan on using the money to immediately pay off the loan so they’ll be in the clear. They might take your word for it, but may want to accompany you to the bank or lender so that they can verify the situation and make sure you follow through.
Your options for selling a car under finance
You have a few different options that work well in different circumstances.
Sell your car and use the money you get for it to pay off the loan
- Look at how much you can sell the car for, and look at how much it will cost you repay the loan in full, including any early repayment fees and other costs. This gives you an idea of how much you will make or lose off the sale, and whether it’s really worth it.
- You should disclose to the buyer that the car has money owing on it. You will most likely need to satisfy them by making it clear you will pay off the loan in full immediately after the transaction.
- If the terms of your loan do not allow you to sell the car then this option might not be available to you. The exception is if the buyer trusts you enough to buy a financed car from you on your word that you will immediately use the money to pay off the loan. Here you can make the trade, pay off the finance and then make the sale official after that. Only do this with the approval of your bank or lender
Advantages: This option is good for when money’s tight, and it’s an efficient way of recouping expenses. You may also be able to make a profit, but it’s good for when you don’t plan on getting a replacement car.
Disadvantages: You have to sell the car for enough to repay the loan and it can be difficult to sell a car with outstanding financing.
Refinance your car loan
- This is when you take out a new loan with more favourable terms and use it to pay off your car loan. You will have to pay fees and interest rates when opening the new loan, and there will be potential charges when closing down the old one. Whether this is a good idea depends on the terms of both the new and the old loan.
- Calculate, as precisely as possible, exactly how much you will save by refinancing your car loan. Consider it, check it and double check it before committing to refinancing.
- The type of new loan you take out will depend on your situation. If you plan on selling the car as soon as it’s out of finance, or you only have a small amount left to pay off, then a small personal loan might be suitable over a refinancing loan.
- If you are selling a car under finance, you can also consolidate your debt at the same time to get rid of the debt and sell the car.
Advantages: You can quickly pay off your car loan if you find a good buyer straight away, and you may be able to save some money by switching to a more preferable loan. You’re also able to switch from a secured loan to an unsecured loan so you can sell the car.
Disadvantages: It requires taking out a new loan of which the terms and conditions may not always be more favourable, and it may negatively impact your credit history if you apply for a loan too soon or make several applications for credit.
Pay off the car loan with your own savings or credit card
- Depending on your savings, this might be the best way to pay off your car loan.
- Credit card debt may bring higher rates than a personal loan.
- Good planning can help you keep costs down if you choose to use your credit card. If you can’t meet the minimum repayments, for instance, or if you aren’t able to sell the car quickly enough, it could end up costing you more than other options.
Advantages: Paying the car loan in full out of your own savings means no new debt. Alternatively, consolidating debt onto a low or no interest credit card can be advantageous if you know you’ll be able to make the payments.
Disadvantages: Having to dip into your savings.
Upgrade your car at a dealer
- If you want to upgrade your car, many dealers will incorporate the terms of the loan into a trade-in deal, particularly if it’s the same dealer you got the previous car from. Outstanding finance on a car doesn’t mean you can’t trade it in to pay towards a new one.
- If your car is less than five years old and in good condition, you will probably have few issues getting a reasonable trade-in, on account of the car still being fairly easy for the dealer to resell.
- The dealer can pay off the lender themselves as part of the conditions of the trade-in, and will often work with you to make it simpler. The more upfront you are about how much finance is on the car, the more they may be able to help.
- You can also downgrade your car if you’re looking for something more cost-effective going forwards and want more money in your pocket after the trade
Advantages: This can be a good way of upgrading, downgrading or changing your car, and many dealers are happy to work with you to make a fresh sale. You may also be able to get more reasonable rates going forward
Disadvantages: It may leave you with a worse financing deal and it requires you to trade-in for a new car rather than simply selling it.
What do you need to keep in mind when selling an encumbered car?
- Ideally, you will not need to sell a car that’s under finance. If you plan on selling a car in the future it’s best not to have it under finance.
- The value of a car can drop considerably in a few short years. Consider depreciation when taking out a car loan and how this will affect your ability to resell the car.
- Generally your two options are to pay off the loan and then sell the car, or to sell the car finance and all. Your only choice is the first option if you have a secured loan that uses the car as collateral.
- Most people wouldn’t want to buy an encumbered car, given the choice. If you are selling the car with debt rather than paying it off before selling it, you need to be clear about this as loan ownership is transferred with the car.
- You should discuss your options with your lender before selling the car. They can help you understand the conditions of your loan and your options, and may also be willing to readjust the terms of the car loan if it might help you to keep it and continue making repayments.
Have more questions?
My car has finance on it. Is it better to sell it privately or at a dealership?
Both options work. You may be able to get a better price selling it privately, but the outstanding finance is more likely to be a headache and turn private buyers away compared to reselling it at a dealership.
What do I need to do before handing over the keys?
Before you actually hand over the car, you should know exactly what’s going to happen to the finance on it. Someone needs to give the lender their money, and both you and the buyer need to know who it’s going to be.
Help! No one wants to buy my car with finance.
If you aren’t upfront about the car having finance, such as when placing an ad, then it might look a bit shady when you only disclose that later. You need to proactively make it clear that you have a plan for repaying the loan.
Can buyers tell if a car has finance on it?
Yes, because you’ll tell them. They can also find out by getting an inexpensive history check of the car, which details whether or not it’s encumbered.
Should I plan to sell a car under finance later?
Ideally, your plans shouldn’t include selling a car while it’s still under finance because you generally won’t end up getting value for money.
Should I get a secured or unsecured car loan? How does this affect resale?
Secured loans that use the car as collateral have better rates than unsecured loans, but will need to be fully paid off before you can sell the car. Unsecured loans have worse rates, but you can sell the debt along with the car.