If you've purchased a vehicle using a secured car loan and haven't yet paid it off, the car is considered encumbered as it's still part-owned by the lender that gave you the loan. It can therefore be difficult to sell the car before you've paid off your loan, but it is possible.
Read our guide to find out your options when it comes to selling an encumbered car.
While you can sell a car that's still under finance, there are a number of potential issues you will need to consider.
With a secured car loan, it's the car itself that the loan is taken against, not the original buyer. As a result, if you sell the car but fail to repay the loan, the new buyer may find that the lender takes ownership of the vehicle. The buyer must trust that you will pay off your loan in full or else they risk losing the car. This makes your vehicle a less attractive option for potential buyers.
However, it's perfectly legal to sell an encumbered car and you just need to be upfront with potential buyers about the situation. If you wish to sell your car, you should also notify your lender and it will explain how you can pay off your loan.
Most lenders may allow you to sell the car, provided you use the money to then pay off your existing loan. Depending on your loan, you may need to pay additional fees for paying off your loan early.
If you used a different asset as security against your car loan or if you opted for an unsecured or personal loan to help purchase your car, you're free to sell the car when you wish, but you will still need to continue making repayments until you have paid off your loan.
What do you need to keep in mind when selling an encumbered car?
Ideally, you won't 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 while it's still under finance.
Given the choice, most people wouldn't want to buy an encumbered car. If you're 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. It can help you understand the conditions of your loan and your options. Your lender may also be willing to readjust the terms of the car loan if it might help you to keep it and continue making repayments.
Questions to ask before selling your car
If you want to sell a car under finance, you should first be able to answer the following questions:
How much is still owing on the car? You need to know how much you still need to pay back on the loan.
How will you pay back the lender? You need to keep the lender happy by paying 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.
Does my loan allow me to sell the car? If you're using the car as collateral in a secured loan, you may not be able to sell it until you've completely paid it off, depending on the terms of your loan. This is something you should check with your dealer before you sell the car.
How do I sell a car under finance?
If you want to sell a car you still owe money on, you can do so by following the steps below:
Notify your lender. Before arranging to sell your car, you should let your lender know and discuss your options. Depending on the terms of your loan, you may need to pay off the loan before you can sell the car or you may be able to arrange for the buyer to pay your lender directly. Your lender may also allow you to sell your car provided the money you receive is immediately used to pay off the remainder of your loan.
Find a buyer. After you have cleared the sale with your lender, you're free to find a buyer. You may choose to advertise the car online or in other media, or find a buyer directly. Once you've found a buyer, you must also notify them that the car is under finance and explain what they will need to do.
Finalise the sale. Once you've agreed a price with the buyer, you can finalise the sale. Both the buyer and lender should request that they arrange the payment directly, with you receiving any money left over from the sale after the remaining loan amount and any early repayment fees or other charges have been paid off. If the buyer requests that you organise payment with your lender, you must do so once you have received the money.
Transfer ownership. You should arrange a time with the buyer to pick up the vehicle. It is their responsibility to transfer the registration into their name, but you will need to provide them with a proof of purchase document and also lodge a notice of disposal to confirm you no longer own the car.
What are my other options?
Regardless of your situation, it will generally be easier to sell your car after you've paid off your existing car loan. You have a number of options when it comes to paying off your loan. These include:
Pay off the car loan with your own savings
If you have enough in savings, you can use the money to pay off the rest of your loan. Your car will then no longer be considered encumbered and will be easier to sell.
Benefits and drawbacks
You don't need to take on new debt
You will eat into your savings
You will need to pay any applicable fees or charges for paying your loan off early
Refinance your car loan
If you're struggling to pay off your loan and are trying to sell your car as a result, it may be worth trying to refinance it to help reduce the cost of your loan. If you find a loan with more-favourable terms, you can use it to pay off your existing loan and then continue to make lower repayments on the new loan.
Benefits and drawbacks
You can get a more affordable loan
You can switch from a secured to unsecured loan, meaning you can sell your car when you wish
Applying for a new loan may affect your credit score
You may have to pay fees and charges for ending your existing loan and starting a new loan
Upgrade your car at a dealer
If you were planning to sell your car in order to upgrade to a new one, a dealer may be able to help you do so. You can trade in your existing vehicle to cover what you owe on your existing loan and then get financing for a better car or downgrade if you're looking to save money. The dealer will often be able to arrange the payment to the lender on your behalf.
Benefits and drawbacks
You can swap for a more suitable car
You can cover your existing loan
You may be taking on new debt
You may be able to get a better price for your car elsewhere
You will need to pay any applicable fees or charges for paying your loan off early
Frequently asked questions about selling an encumbered car
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 its 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 you're placing an ad, then it might look a bit shady when you 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?
Potential buyers can find out if a car is under finance by getting an inexpensive history check of the car. Either way, you should always notify a potential buyer if your car is 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 it can be complicated to sell a car that's still under finance. Unsecured loans will generally have higher rates, but leave you free to sell the car when you wish. However, you would still be required to pay off the rest of your loan.
Elizabeth Barry is Finder's global fintech editor. She has written about finance for over six years and has been featured in a range of publications and media including Seven News, the ABC, Mamamia, Dynamic Business and Financy. Elizabeth has a Bachelor of Communications and a Master of Creative Writing from the University of Technology Sydney. In 2017, she received the Highly Commended award for Best New Journalist at the IT Journalism Awards. Elizabeth's passion is writing about innovations in financial services (which has surprised her more than anyone else).
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