A car loan can be a great way to buy a car quickly and affordably, but they can make it a bit tricky to sell that car if you haven’t fully paid off the loan. If you decide to sell your car, you need to know what happens if it is still under finance.
A car "under finance" generally refers to the owner of the car buying the vehicle with the assistance of a car loan. One of the most common types of car financing is a secured car loan, where the car you're buying is secured as an asset against the loan as collateral.
This is the more popular type of car loan, and essentially means that the lender can take and sell the car should you fail to meet your repayments and default on the loan. The benefit of such a loan is they tend to have lower interest rates and fees than unsecured loans.
Once you've fully paid off your loan, you then own it outright, and the lender can no longer sell it if they need to. Fully paying off your loan also makes it easier to sell a car, as potential buyers might not want to to buy your car if it is still ‘under finance'.
A car being ‘under finance' or encumbered, is when you still owe money on the car loan. So if you took out a $30,000 car loan, and after a few years owe $5,000, that car would still be encumbered to the sum of $5,000. You don't own all of that car, and still have another $5,000 to pay.
If you decide to sell your car that still has finance owing on it, this can present complications both for you, the lender and the buyer, as the car is moving to a new owner but the loan is still in your name. If you stop repaying the loan, the lender will have to collect if off the new owner.
It's still perfectly legal to sell an encumbered car, and most lenders will still allow you to do so: They may just request that you use the funds received for the vehicle to pay off any of your remaining loan balance. For example, selling that $30,000 car for $18,000 a few years later, you'd have to spend some of that cash to pay off your remaining $5,000.
You may have to explain to the lender how you plan to pay off the loan before you sell it, and if you've sold the car before your loan term has ended (likely if you still owe money on it), then you might have to pay an early repayment fee or a break fee as well.
Buyers are less likely to buy a car if they know finance is owed on it, but it must be disclosed to them beforehand. This means that you may not be able to get the best possible sale price for the vehicle.
If the buyer does end up purchasing the car even with finance owing, you will need to transfer the registration of the car to their name, but it is the seller's responsibility to provide them with proof of sale.
How to check if a car has finance owing
If you want to double-check whether you still owe money on your car loan, you can either ask your lender. Lenders and car dealers may charge you fees for this, and you also have the option to do a PPSR check to see whether you still owe money on your car loan, online for $2 at ppsr.gov.au This is also useful if you're buying a used car, to check if it's still encumbered.
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 .
Depreciation costs for cars can be significant and often they will drop in value very quickly, often losing around a third of their value in just three years, which is just under the standard car loan length of five years.
Selling your car for as much as possible can help you pay off any remaining car loan debt you have, as well as finance the purchase of your next car, so try to increase your car's resale value by regularly doing the following:
Service it often
A well-documented logbook with history showing you've serviced on time can boost your resale value, yet only 52% of car owners (based on Queensland figures) get regular car services.
Replace the tyres
Before you sell, getting new sets of tyres on the car can make it more appealing to second-hand buyers. You can also fix ‘gutter rash' - those scrapes you get on tyres and the rim of the car - for about $100 or so, depending on the size of the scrape.
Fix any chips, scratches, cuts and cracks
It could be worth spending a bit of money getting someone to have a look over the car's exterior and remove any chips in the paint, scratches or cracks in the windscreen, as a dodgy-looking car won't sell for as much.
Fill it with fuel, and give it a deep clean
No one wants to buy a filthy car, so vacuum it, wash it down and even give it a buffer if you want, or get someone else to do all this for you. Filling up the tank is just a courtesy to the buyer.
To make sure you don’t sell an encumbered car, pick or switch to a car loan with a low interest rate that gives you manageable repayments. loans.com.au’s car loan products have some of the lowest interest rates on the market, so calculate what your car loan repayments would be with loans.com.au here and speak to one of our expert lending specialists to apply.
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