How to Sell a Car With a Loan
Learn how to pay off and transfer the title for a financed car
Selling a car can be a complicated process, and it’s even more intimidating if you still owe money on the vehicle you’re selling. Fortunately, it’s a common transaction that people do every day. It will be slightly easier to sell a vehicle you own free and clear, but you have several options when it comes to selling a financed vehicle.
The specific course of action you must take will depend on several factors, including where your loan is held and who you’re selling to (a dealer or a private buyer). The following infographic provides a general overview of how to sell a car with a loan.
Ask Your Lender for Guidance
First, ask your lender what you need to do to sell a car with a loan. You don’t have to figure everything out yourself—they’re pros, and they can help. Call and ask if they have any suggestions for selling the car while the loan is in place. Your lender might even have a local office where you and the buyer can meet, which would make the transaction much smoother. Ask if there’s anything else you need to know about, such as prepayment penalties (penalties for early loan payoff) and the estimated processing time for sending the title after the lien on the vehicle has been released.
Get an Official Payoff Amount
Technically, you probably won’t sell your car with the loan outstanding. Instead, you’ll most likely unwind, or close out the loan, at the same time as (or ideally before) you start the selling process. You’ll need to determine exactly how much you still owe your lender so that you can pay off the loan and transfer the title to the buyer.
- Inquire with the lender. Before you can pay off your loan, ask your lender for a "payoff amount," which is the exact amount that you have to pay to satisfy the loan terms and have the lender release the lien on your vehicle. Your goal should be to pay off this amount as quickly as possible so that your vehicle sale is not delayed.
- Get a payoff letter. To make it official, get a payoff letter, which is an official document from your lender stating the payoff amount. Details include how much your payoff amount changes from day to day, and instructions for completing the payment (for example, acceptable forms of payment, or where to wire the money). You may not know exactly when you’re going to sell your vehicle, and interest charges will change the amount of your loan from day to day. Armed with all the details, you won’t get caught by surprise.
Your payoff amount also includes interest you owe until the time you plan to pay off your loan and other unpaid fees. For this reason, it may not be the same as your current balance, which is the amount you currently owe on the car.
Provide a Clear Title
You’ll need to transfer the title to your buyer to complete a sale and allow the buyer to register the vehicle in his name. Transferring the title generally involves signing the back of the title to indicate that you are giving up ownership to the buyer. You may also need to supply the buyer with a bill of sale, which contains seller contact information, sale date, sale price, vehicle odometer reading, and signatures of both parties. In some states, like Alaska, the title serves as a bill of sale and gives the buyer everything needed to register the vehicle in her own name.
Buyers generally won't be willing to pay unless you have a clear title in-hand that you can furnish during the sale. Since a clear title is one that is clear of any claims, you won’t have a clear title if you still owe money on the car. If the car is still financed, the lienholder's name will appear on the title to indicate its financial interest in the car.
Pay Off the Loan
If possible, the best thing to do is to pay your loan off long before selling the car. That way, you’ll have a clear title that you can simply sign over to the buyer. This is most attractive to buyers, so you’ll have an easier time selling the car. If you want to sell a financed car without paying it off, getting the title will be a hassle, as some buyers may be hesitant to buy.
You’ll often get cash after you sell the car, so you may be able to recoup some or all of the funds you use to pay off the loan on the financed car.
Follow these best practices for loan payment.
- Find out what the current vehicle is worth. Use resources such as National Automobile Dealers Association's (NADA) Guides or Kelley Blue Book to determine what your car is worth so that you can negotiate a fair price.
- Postpone the sale or pay down debt if you have negative equity. If you’re upside-down on your auto loan—that is, you would be selling the car at negative equity because you owe more than the car is worth—you’ll need to come up with extra cash (above and beyond what you can sell the car for) to pay off your loan. You might choose to postpone the sale until you can afford to pay down the loan and achieve a positive equity position. Or, you might choose to proceed if you can come up with the money through other means.
- Consider borrowing. If you want to get the lienholder's name off of the title but don't have the money to pay off the loan, consider obtaining a low-interest loan with a short loan repayment term and then pay it off as soon as possible. Online lenders such as Lending Club and Prosper are a good place to look, but also ask about personal loans at your local bank or credit union.
To prove to the seller that you paid off the car, obtain from the lender a signed lien release letter or a regular letter on the lender's letterhead stating that it holds no financial interest in the car.
You can sell a financed car with or without paying it off by trading it in with a dealer or selling it to a private buyer.
Trade It in With a Dealer
While trading in a car offers simplicity, it could limit your profit from the transaction.
- It's easy. Trading in your car is often easier than selling it to an individual. It's easier to find dealers, and they commonly handle transactions like this, so they’ll deal with all the paperwork behind the scenes. Many dealerships can complete the trade within a day. After paying off your loan ahead of time, it’s the next best option in terms of convenience.
- You may pocket less money. The ease of trading in your financed car does not come for free. You'll often get less for your car than if you were to sell it to a private buyer. What’s more, if you have negative equity, some dealers will build the cost of the negative equity into the new car loan, so you may end up transferring debt from one automobile to another. The debt can eventually snowball out of control.
Sell to a Private Buyer
Selling a car through a private buyer (through classifieds or an online service) can reward you financially and increase your selling options, but it poses hassles that trade-ins usually don't.
You can get more money. You’ll often get the best price for your car if you sell to a private buyer who wants to own and drive the car.You may even be able to sell it for more than its wholesale value.
You can sell without a title. Selling with a title is always urged to enable a good-faith sale. But if you're in a hurry, and if the buyer trusts you, the buyer can take it off your hands with the understanding that the title is not yet available. This is risky for the buyer because he may have trouble with vehicle registration or face repossession or stolen car suspicions by law enforcement. But if the buyer is willing, and you document everything, you may be able to hand over the keys, pay off the loan with the sales proceeds, and then sign the title over after the lien is released by your lender.
You may have to visit a state agency to complete the transfer. Most states require the buyer to go to the state agency that administers vehicle titles (such as the Department of Motor Vehicles or the Department of Public Safety) to register a vehicle and provide a certificate of the title as proof of ownership. In general, dealerships will send the application for vehicle registration and the certificate of the title on the buyer's behalf, whereas a private buyer will have to do this herself. If the buyer doesn't take these steps to properly transfer ownership, the seller could be liable for the new owner's fees or even expenses incurred from accidents. This means that you may have to visit your state agency with the buyer to ensure a smooth transfer of ownership.
You may experience fraud. If a seller pays in a method other than cash, the payment turns out to be fraudulent, you may have little recourse for recouping the funds. While only accepting cash is one way to guard against this scenario, another option is to use a neutral intermediary (that both of you trust) to make sure that the deal goes smoothly. Escrow services such as Escrow.com can facilitate the deal and protect both buyers and sellers. If the buyer doesn't pay, you keep the title. If you don't deliver the title and the vehicle, you don't get the money. The key is to find a third party that is affordable, reputable, and easy to work with.
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