Somewhere between 80% and 90% of all new cars bought in the US are bought on finance, and more than half of used vehicles bought each year are on finance too. About a decade ago, the most popular length of an auto loan was 60 months, but by 2018 that had grown to a massive 72 months. It's therefore inevitable that a lot of people will want to change their vehicle while they still have finance outstanding, so is it hard or easy to sell a car you haven’t paid off yet?
It's actually very easy to sell a car that has outstanding finance if you are selling to a dealer. It's a little harder if you are going to sell privately through Craigslist, eBay or some other platform, but it also depends on what type of finance you have. Here are the topics we're going to look at:
- Types of finance
- Get a settlement figure
- Paying off your finance
- Selling to a dealer
- What if you’re upside down with your auto finance
- Selling to a private buyer
- Vehicle history reports
- Don’t feel like a victim
Types of finance
The first thing you need to know if you want to sell a car you haven’t paid off yet is what type of finance it has on it. If you have a type of finance that's secured on the vehicle itself, you cannot sell it without sorting things out with the finance company because they are the ones who own it and hold the title until it is paid off.
However, if you took out a personal loan that you could have effectively used to buy anything, it's up to you whether you pay it off or just continue to make the payments. With a personal loan, the finance company doesn't have on hold on your vehicle, even if they asked what the loan was for when you took it out and you said that it was to purchase a vehicle.
If you have a lease, an auto loan or a balloon finance agreement you'll have to come to an agreement with the finance company. A lease is different from other types of auto finance and you can find out about getting out of a lease agreement early here.
Get a settlement figure
The first thing you need to do is get a settlement figure, which is a quote from the lender that states exactly how much you owe at the moment. Depending on the type of agreement you have, the figure quoted will either last until a certain date a few days or weeks ahead, or it might say how much it is today and how much it will change pre-day from that moment onwards.
Even if the figure is only for that day, it at least gives you a good idea of how much it is going to take for you to get clear title to be able to sell your vehicle privately. If you’re selling to a dealer, you'll know how much you need to get before there's going to be anything left over for you to put towards your next car.
Unfortunately, a lot of people will find they actually owe more than the vehicle is worth, especially those who have taken out lengthy agreements and nowhere near the end of the term. This is a situation called having negative equity or being upside down on your loan, and this means you are going to have to pay the difference between how much you owe and how much you get for your car. I'll cover this situation shortly.
Paying off your finance
The easiest way to deal with an auto loan when you want to change your vehicle is to just pay it off and get clear title. If you can do this you can sell your vehicle to anyone from anywhere, and all you have to be concerned about is getting your hands on the buyer's cash or cleared funds in your bank account.
You don’t even have to have the cash to do this as you're perfectly ok to take out a bank loan to do it or even roll it into the next auto loan. Whether you take out a bank loan or you have the cash to pay off your finance agreement, you can always pay off the new loan or put the money back into your account once you have sold the car and got the money from the buyer.
Rolling outstanding finance into a new finance agreement isn't always a great idea, depending on how much you are rolling over and how much you are borrowing for your new ride. If you’re not already in negative equity, you probably soon will be if you go down this route.
Selling to a dealer
The easiest, hassle-free way of getting out of a car you still have finance on is to sell or trade-in to a dealer. They do this all the time and it's a normal part of the buying and selling process for them. You don't have to worry about dealing with the finance company as they will do all that for you. If you get a higher sum of money for your vehicle than the amount of the outstanding finance, the difference is yours to do whatever you want with. You can take the money and keep it, or you can use it towards your next vehicle.
Because the dealer is going to be paying the finance off for you, there's no need to worry about getting the title as they handle all the paperwork. Whether you have equity in your car or you’re upside down and in negative equity with your car, it's always going to be easier to have the dealer handle the paperwork. You may get a better price selling privately, but it's up to you if you think it's really worth your while dealing with everything yourself instead of letting the dealer take care of things for you.
What if you're upside down with your auto finance?
If you do owe more on your auto finance agreement than you’re going to get selling your vehicle it's not the end of the world. In fact, it's incredibly common for buyers to find themselves in this situation even though it's far from ideal or desirable. Once again, if you’re selling to a dealer there's no real problem.
Let's look at an example. Let's say you have $13,000 outstanding on the vehicle you want to change and the price offered by the dealer is $11,000. You then have a shortfall of $2,000 that has to be paid somehow. If you are trading in you will effectively find yourself paying $2,000 on top of the price you are paying for the new vehicle. If you agree on a price of $31,250 for the new vehicle, you'll have to pay or finance $33,250. If you are not trading in and you’re just looking to sell, you will have to give the dealer your car and $2,000 to be able to walk away.
If you’re selling privately you'll have to pay the finance off just the same as I mentioned above. The only difference is you'll be paying more money than you’re going to be getting from your buyer. The options of borrowing or rolling into a new finance agreement are still there, but it's obviously going to be even more expensive.
Selling to a private buyer
The big issue with selling a vehicle privately that has outstanding finance on it is a matter of trust. A buyer who has any idea of what they are doing isn’t going to part with cold hard cash for your vehicle if you don’t have the title, and you won’t have the title if you have an outstanding auto loan.
There are a number of ways you can negotiate this particular problem. If the lender has a branch in the area you can go there and the buyer can pay the loan off with you both there and give you the difference. If you’re upside down on the loan, you will have to hand the difference over to the lender as well as the buyers giving them their share.
Another useful option is to use a neutral intermediary that both of you can trust to make sure the transaction goes as smoothly and safely as both parties would like. Escrow services are a superb way for both buyers and sellers to be properly protected, and there are even some online escrow services available you can check out. If the buyer doesn't pay up you keep the title, and if you don't pay off the loan and therefore can’t come up with the title, you don't get any money.
Vehicle history reports
If you're buying a vehicle privately and the seller doesn’t have a vehicle history report showing they are the current owner, and they don’t have the title available, the chances are that a finance company is still the owner. It's not a problem as long as they are upfront about it and you both follow the appropriate steps.
When you are the seller it's a good idea to pay for a vehicle history report once you've paid off the finance. If you don't have the title in your possession yet, you can show this to buyers to prove you are the rightful owner and are in a position to sell the car and that the title will be available shortly.
When you’re buying privately it's always a good idea to get a vehicle history report before you commit to buy and handover any money. Most dealers will do a history check as a matter of routine and it will be readily available for any prospective buyer to view. If you’re selling privately it will always help your selling efforts if you have a history report to hand and it doesn’t cost a lot to get hold of one.
Don’t feel like a victim
I'm going to tell you something now that's very important to keep in mind if you have outstanding finance on your vehicle and you’re going to trade it in as part of a deal for a new vehicle. You must not fell like a victim and you should not let the dealer make you feel like they are doing you a favor.
As I mention in various articles across this website, a finance customer is far more valuable to a dealer than a cash buyer. They might know that you are going to have to finance again, but you can go anywhere you want and can take your valuable business with you if they don’t give you a good enough deal.
It's even more the case if you have negative equity. Some dealers might try to take advantage of you and give you the impression you have to accept what they are offering because of your situation. You don't, and because you are probably going to be funding even more than the cost of the new vehicle, the amount of commission they are going to get is even more than it would be with a customer who isn’t upside down with their loan.
Obviously, being upside down with your agreement and having negative equity isn’t ideal by any means, but you can still use it to your advantage to make sure you get as good a deal as you possibly can.