If you’re curious about how to sell a financed car, or if you’re looking at buying a car that has existing finance owing on it, we’ve written this guide to help you bring yourself up to speed on some of the things you need to know about selling a car under finance.
Selling a car under finance
Before we get into the nitty-gritty of what needs to happen when buying or selling a car that has outstanding debt on it, let’s first look at where issues can arise, and why it’s so important to follow the rules.
A financed car belongs to the lender
When you sell a vehicle, you effectively transfer ownership from yourself to the new buyer in exchange for money. However, if you have a secured loan on the car, the car doesn’t technically belong to you. Instead, the loan is linked to the vehicle, regardless of who it’s registered to.
If you choose to sell your car, the new owner presumes that the car is theirs. The registration details are completed in their name, and they use the car as their own. The major issue that can arise here is, if you don’t use the proceeds of your car sale to pay off your car loan, the credit provider who gave you the loan can legally seize or repossess the car if you default on your loan — even if the car now lives with its new owner!
Imagine if you were in the buyer’s shoes — you’ve saved up or potentially borrowed money to buy a used car, only to have a credit company come knocking at your door to take the vehicle away in order to pay off the previous owner’s loan!
It is therefore very important to disclose to the new buyer any outstanding finance that you have for the vehicle, so that it can be paid off before or at settlement.
Vehicle Encumbrance only applies to a secured loan
An encumbered vehicle simply means a vehicle that has a secured car loan with an outstanding balance attached. Vehicle encumbrance only occurs when the car has been used as security against a car loan (i.e. a secured car loan). If you purchased your car with an unsecured loan, then the vehicle isn’t linked to the loan and doesn’t make your car encumbered.
But it is best to perform a search of the Personal Properties Securities Register (“PPSR”) to see what encumbrances are currently being held over the vehicle that you are trying to sell, or the vehicle that you are wanting to buy. A PPSR search should tell you everything you need to know about existing encumbrances, and the search is very affordable!
The steps to sell your car with a car loan attached
It is perfectly legal to sell a car that still has finance attached, but here’s what you should do to save yourself a lot of trouble:
1. Understand your outstanding car loan balance
Before you place your vehicle on the market to sell, it pays to know how much you need to get for it to have the loan completely paid off. Looking at the outstanding balance on your statement won’t include additional fees such as a break fee or early repayment fees, if any (because you’ll be repaying the loan early); so get in touch with your lender or financial institution to find out the exact remaining loan amount plus any costs or exit fees (current payout figure).
2. Listing your car for sale
When you list your vehicle for sale, be mindful that a lot of potential buyers will want to haggle down or negotiate the price. Conduct your research into what your make and model are currently selling for, and factor in how much you need to in order to pay out your car loan, including any early repayment fee. Finance One customers with consumer loans don’t have to worry about early repayment fees, so you can payout your loan without incurring that extra cost.
It’s up to you whether you want to put in your ad that you owe money on the car or not, but at some point, it will need to be discussed with the potential buyer that you’re selling an encumbered car.
3. Expect inspections and checks
Buying a vehicle privately does mean conducting some due diligence. Ultimately, it is the buyer’s responsibility to make sure that the car has a clear title (meaning that there is no finance still owing on the car). A potential buyer can check this by looking at the PPSR.
Being transparent about having debt over the car can not only save you a potentially hairy conversation with a disgruntled buyer, but can also work in your favour as you look to negotiate price.
4. Completing the transaction
Selling a financed car usually comes with a more complicated transaction process when it comes time to hand over the vehicle. Expect your buyer to want proof that you’ve paid the loan off before the vehicle gets transferred into their name. There are a few options to do this, depending on the financial situation of the buyer.
Perhaps one of the safest ways to make this happen, especially if you need the buyer’s money to pay off the loan, is to finalise the sale of the vehicle in the office of the financial institution where your loan is held. This means that instead of being paid directly, the person purchasing the vehicle pays off the loan directly — providing them with the confidence that the loan has been paid out and the encumbrance can be removed. Most lenders are experienced with this type of transaction, as they understand personal loans, including secured loans, very well.
Car loans are made easy with Finance One
Car loans, car financing and personal loans are some of what we do best at Finance One. Whether it’s a new car you’re searching for or looking to get a used car loan, but need to sell your current vehicle first, we’re happy to help as much as possible.
Once approved, we can work with you to devise a loan term and interest rate that works for you, so that you can get your own car, sooner.
Disclaimer: The information above is of a general nature only and does not consider your personal objectives, financial situation or particular needs. You should consider seeking independent advice regarding your legal, financial, taxation or other needs, to check how the information relates to your particular circumstances. We do not accept responsibility for any loss arising from the use of, or reliance on, the information. All loan applications are subject to normal lending criteria. Fees and charges payable. Terms and conditions apply.