How to Sell a Car That You Owe Money On

Learn how to pay off and transfer the title for a financed car

Selling a car can be complicated, and it’s even more intimidating if you still owe money on the vehicle. It is 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 take will depend on several factors, including where your loan is held and whether the purchaser is a dealer or a private buyer.

© The Balance, 2018

Step 1: Determine Your Payoff Amount

It's a good idea to start out by checking with your lender for guidance and to find out exactly how much you owe. To make it official, get a payoff letter from your lender. This official document states the payoff amount, a date by which the amount is still accurate, and instructions for completing the payment, including 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 daily. 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.

When contacting your lender, it's also a good idea to 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 can make for a smoother transaction. Topics to ask about include potential prepayment penalties and the estimated processing time for receiving the title after the lien on the vehicle has been released. Specifics will be different depending on the state where you live. 

You probably won’t sell your car with the loan outstanding. Instead, you’ll likely close out the loan at the time of the sale or before. After paying off the loan, the lender can release the lien on your vehicle and you can transfer the title to the buyer.

Step 2: 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, so some buyers may be hesitant to buy.

Follow some best practices when paying off the loan:

  • 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 owe more than the car is worth—you’ll need to come up with extra cash 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 repayment term, then pay it off after receiving funds from the sale of the vehicle. 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.

Step 3: Provide a Clear Title

Transferring the title to your buyer completes the sale and allows 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 also may 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. Specific requirements vary by state. In Alaska, for example, the title serves as a bill of sale and gives the buyer everything needed to register the vehicle in her own name.

To prove to the seller that you paid off the car, obtain from the lender a signed lien release or a letter on the lender's letterhead stating that it holds no financial interest in the car.

Buyers generally won't be willing to pay unless you have a clear title you can furnish during the sale. 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.

Selling to a Dealer

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.

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.

The tradeoff is that 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. 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 eventually can snowball out of control.

Selling to a Private Buyer

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 also can sell without a title if you're in a hurry. If the buyer trusts you, he can take the vehicle 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. However, 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 sign the title over after the lien is released by your lender.

Beware of fraud when selling to a private party. Accepting only cash is one way to guard against this scenario, but another option is to use a neutral intermediary to make sure the deal goes smoothly. Escrow services such as Escrow.com can facilitate a 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.

When selling to a private party, 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 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 a buyer's behalf, but a private buyer typically 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.

Article Sources

  1. Texas Department of Motor Vehicles. "Add or Remove a Lien on a Vehicle." Accessed Jan. 23, 2020.

  2. Consumer Financial Protection Bureau. "What Is a Payoff Amount? Is My Payoff Amount the Same as My Current Balance?" Accessed Jan. 23, 2020.

  3. Federal Trade Commission. "Financing or Leasing a Car." Accessed Jan. 23, 2020.

  4. Consumer Financial Protection Bureau. "What Happens If I Still Owe Money on the Vehicle I Want to Trade-In?" Accessed Jan. 23, 2020.

  5. Idaho Transportation Department. "Vehicle Titles," Page 2. Accessed Jan. 23, 2020.

  6. Consumer Financial Protection Bureau. "What Is Negative Equity in an Auto Loan?" Accessed Jan. 23, 2020.

  7. Alaska Division of Motor Vehicles. "Title Change—Add or Remove an Owner." Accessed Jan. 23, 2020.

  8. State of California Department of Motor Vehicles. "Vehicle Registration and Title Information." Accessed Jan. 23, 2020.

  9. Magnussen Toyota of Palo Alto. "Should I Trade in My Car or Sell It to a Private Party?" Accessed Jan. 23, 2020.

  10. Federal Trade Commission. "Auto Trade-ins and Negative Equity." Accessed Jan. 23, 2020.

  11. The Office of the Minnesota Attorney General. "Transferring Title to a Motor Vehicle." Accessed Jan. 23, 2020.