What to know about selling a car under finance

Cars can be expensive, costing anywhere from a few grand to hundreds of thousands of dollars. If you don’t have this cash lying around, getting a car loan can be the helping hand you need to jet off in a new set of wheels quickly and affordably. But unfortunately, having a car loan can make things tricky when it comes time to sell if, at that time, you haven’t fully paid it off.

If you’ve decided now is the time to sell your car, but you haven’t yet paid off your car loan, you’ll need to know how to sell it while it’s still under finance.

What does under finance mean?

If a car is under finance, this generally means the car still has an outstanding car loan on it. Most car loans are secured loans, which means that the asset (the car) is used as security on the loan. If you (the borrower) fail to make your repayments, the lender can repossess your vehicle to cover their losses.

A secured car loan must be secured by that car, and in some cases lenders will allow a borrower to substitute one car for another, but in most cases the lender will request the loan paid off and closed if the car being held as security is sold. Also, if a car is bought by person A, person A gets a loan on the car, but then person B buys that car, the loan can not stay in person A’s name if they don’t own the car anymore.

If you have an unsecured car loan, meaning it’s not being used as collateral on your loan, this is still considered being under finance. If your car loan is unsecured, however, you can sell your vehicle without any restrictions as it’s not being held as security against the loan. You would be required to maintain your loan repayments if the sale price does not cover your loan amount completely. However, most car loans are secured, as these loans usually come with more attractive terms like a lower interest rate.

Is your car encumbered?

If your car is under finance, chances are it's also encumbered. This means that you owe money against it. Let’s illustrate this with an example.

Let’s say you took out a $30,000 car loan to purchase your new car. After five years of owning the vehicle, you still owe $5,000. That means that your car is encumbered by $5,000. Once you pay off the remaining $5,000, you would own the car outright and it would no longer be encumbered. Until that point, you don’t own the entire car yet.

But buying a car with finance doesn’t necessarily mean your car is encumbered. For example, if you used an unsecured car loan, personal loan, credit card, or any other unsecured credit product to purchase the car, it won’t be considered encumbered. This is because the lender can’t repossess the vehicle if you fail to make your repayments.

Is it legal to sell a car under finance? 

While there are a host of complications when selling an encumbered car, it’s perfectly legal to do so. Most lenders won’t have an issue with you selling your car while it’s still under finance, but they will request that you pay off the balance of your loan once you receive the funds.

For example, let’s say you’re selling the car you purchased for $30,000 a few years later for $18,000. You’d be expected to take a slice of this money to pay off your $5,000 balance still owing on the car loan.

Depending on your lender and your car loan terms, you may need to pay a break fee or early repayment fee when paying off your balance. Be sure to read over your contract or ask your lender if you’re not sure.

What is the process of selling a car under finance?

In most cases, you’ll need to explain to your lender how you plan on paying off your car loan before you sell it. As we mentioned, you may encounter some fees to do so.

If you don’t have the cash to pay off your loan, and you aren’t confident the sale price will cover your loan, you can usually organise the sale through your lender. That way, they receive the money from the sale.

Buyers are less likely to buy a car that’s under finance as it’s a big risk to them. But it must be disclosed to them beforehand, which means you might not get the best sale price when selling.

If, despite all the risks involved, the buyer decides to purchase your car while it’s still encumbered, you need to transfer the registration title of the car into their name. It’s your (the seller’s) responsibility to provide them with proof of sale.

With all that in mind, let’s discuss some things you should consider when selling a car under finance.

Check if a car has finance owing

If you want to double-check whether you still owe money on your car loan, you could ask your lender. Keep in mind they may charge you for this. Alternatively, you can do a Personal Property Securities Register (PPSR) search online for $2 by visiting ppsr.gov.au. This can also be helpful if you’re purchasing a second-hand car to ensure there’s definitely no finance still owing on it before you buy.

Maintain your car to maximise your resale value

If you still owe money on a car loan, but want to sell it to buy a new one, you should do everything you can to maximise its resale value.

Cars can depreciate significantly, often losing about a third of their value in just three years, but this can be exacerbated if the car isn’t taken care of.

When selling your car, you likely want to get the best price possible. This can help you pay off your remaining car loan debt, and even go towards financing your next car purchase, so it’s important to do the following:

• Service it often
• Replace the tyres
• Fix any chips, scratches, cuts or cracks
• Have a full tank of fuel
• Give it a deep clean

Looking to pay off your car loan sooner?

It’s often recommended to pay off your car loan before you sell, due to the array of problems that can come with doing so. If you’re considering upgrading your car and are in the market for a car loan, check out our low rate car loans here.

loans.com.au’s car loan products have some of the lowest interest rates on the market. You can calculate what your car loan repayments would be by using our car loan calculator.

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