What to know about selling a car under finance

So, you’ve found yourself in a difficult situation. You’re interested in getting a new car but still making payments for your current one. The good news is you can sell or trade in a car that’s still under finance. However, you may have to jump through a few more hoops for a successful new car purchase. The key is assessing your options to find the perfect solution. 

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 more often, the lender will request the loan to be 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 to be 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, this means it’s encumbered. Encumbered means you owe money on the vehicle and that a lender has partial interest.

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 and your lender holds an interest worth $5,000 in your car ownership. . 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. 

Is it legal to sell a car under finance?  

While it can be tricky when selling an encumbered car, it’s perfectly legal to do so. 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. 

Typically, the process starts with you listing your car for sale. When the sale has been arranged, contact your lender to discuss the closure of your car loan. Your lender will likely send you a final payout figure (inclusive of any fees and interest as of the date of the request). Then, you simply make the payment to the details provided by your lender or the buyer will make the payment, and your loan will be finalised.

Once your loan is finalised, the lender will release the security out of their name, meaning there will be no lender interest or finance against the car.

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 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. 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. 

How do I trade in my car that is still under finance? 

There are various ways you can go about trading in your car with a loan. The best course of action depend on your current loan and your car’s trade-in value. 

Car financed through a dealership 

You may be able to transfer an existing loan balance to a new car loan. The trade-in value of your new vehicle could roll over towards your next car finance. In some cases, the trade-in value could be enough to cover the remaining loan balance. 

Car financed through a lender 

It’s possible to use the money from trading a car to pay off your existing car loan or minimise the balance. Extra fees for early payments or termination may apply.

If you have an unsecured car loan, your lender may let you continue to pay off your old loan after trading in your vehicle. The drawback to this is that you’ll be making two loan payments: one for your traded-in vehicle and the other for your new car. 

For a secured car loan, most lenders will require the balance of the loan to be paid in full before releasing security over the vehicle. The car cannot be traded in while the lender is still holding security over it. 

Quick overview of the car trade-in process with a loan 

Here’s what you can expect when trading in your car under finance: 

• Step 1: Figure out your car’s trade-in value. Do your research and see how much cars with similar makes and models sell for. Get a trade-in quote directly from the lender. 
• Step 2: Find a car that fits your budget. Use a car repayment calculator to help you determine a price range. 
• Step 3: Collect all the important documents and bring them to the dealership. This includes information about your existing loan, such as your loan account number, remaining balance, and the like. 
• Step 4: See if the trade-in value of your car can cover the outstanding balance on your loan. Some dealerships may pay for the outstanding amount by contacting the lender directly and handling all the ownership transfer paperwork. 
• Step 5: Find a good car loan for your new vehicle. Compare your loan options to find one that fits your needs. Once all that is done, you can finalise your car purchase! 

Some steps may differ depending on your situation. It’s best to talk to your lender and dealership to figure out your best course of action. 

Tips when trading in or selling a car under finance 

There are ways you can make the whole trade-in process easier. Follow these tips and tricks to make your car-buying journey a breeze: 

Be upfront about your situation 

You don’t need to keep the status of your car loan a secret. It’s more helpful and productive if you’re honest about it with the dealership. This allows the dealership to make arrangements with the lender and settle the outstanding loan balance if possible. 

Understand the risks 

Taking out a new car loan could increase your monthly payments. This happens when the trade-in value of your car isn’t enough to cover the remaining loan balance. You could also get negative equity for your vehicle, which occurs when you owe more than what your car is worth. This will make trading in your car more difficult. 

Talk to your lender 

It’s often recommended to pay off your car loan before you sell or trade it in.  

Contact your lender and ask about any fees you may have to pay. Some loans have early termination fees that you have to factor into your budget. Discuss your options with your lender to see if it’s the right time to buy a new car. 

If you’re considering upgrading your car and are in the market for a car loan, check out our range of competitive rate car loans.

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