How to Sell a Car That You Owe Money On
Get the Payoff and Title for a Financed Vehicle
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 – people do it every day. It will be slightly easier if you own the vehicle free-and-clear, but you have several options when it comes to selling a financed vehicle.
There are two key steps to a successful sale:
- Pay off the remaining debt – possibly with the sales proceeds from your buyer, and any extra funds that you bring to the table (if your car loan is upside-down).
- Transfer title to the buyer in a way that is safe – and feels comfortable – for both you and the buyer.
The process will depend on several factors, including who you’re selling to (Is it a dealer or a private buyer?) and where your loan is held. Here’s a basic overview of how to sell your car.
Ask Your Lender for Guidance
First, ask your lender what you need to do to get rid of the loan and sell your car. You don’t have to figure everything out yourself – they’ve done this a million times, and they can help. Just 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 and an estimated processing time for sending the title.
Get an Official Payoff Amount
You’ll need to know exactly how much you still owe your lender so that you can get a clear title.
Eliminate the debt: Technically, you probably won’t sell your car with the loan outstanding. Instead, you’ll most likely unwind the loan at the same time as (or ideally before) you sell the car. Ask your lender for a ‘payoff amount’ which will tell you exactly how much they need to release the lien on your vehicle.
Payoff letters: To make it official, get a payoff letter, which is a document from your lender. Details include you 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 might 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.
The goal is to completely pay off the loan in one attempt so that your vehicle sale is not delayed.
To complete a sale, you’ll need to pass the title to your buyer. This generally involves signing the back of the title to indicate that you are giving up ownership to the buyer. In some states, the title serves as a bill of sale and gives the buyer everything she needs to register the vehicle in her own name (if it contains the sale date, sales price, and signatures of both parties).
Most buyers will not pay unless you can provide a clear title – whether you have it in-hand or can make it available during the sale. You won’t have a clear title if you still owe money on the car – but there are several ways around that problem.
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 getting the price you want. If you still owe money on your car and getting the title will be a hassle, some buyers may be hesitant to buy.
Remember that you’ll get cash after you sell the car, so you may be able to replace whatever funds you use to pay off the loan.
If you’re upside-down on your auto loan, paying the remaining balance is not so simple – you’ll need to come up with extra cash (above and beyond what you can sell the car for) to pay off your loan.
If you need extra money, find an inexpensive loan and pay it off as soon as possible – and buy a less-expensive car.
Trading With a Dealer?
Easy option: Trading in your car is easier than selling it to an individual. Dealers commonly handle transactions like this, and they’ll deal with all the paperwork behind the scenes. After paying off your loan ahead of time, it’s the second best option (in terms of convenience). You might even be able to sell to a dealership without buying one of their cars – some dealers pay for used autos just to sell them on the lot or send them to auction.
Less money: The ease trading in your financed car does not come for free. You’d probably get more for your car if you sell it to a private buyer (through classifieds or an online service). What’s more, you may end up transferring debt from one automobile to another, which can eventually snowball out of control. If you’re upside-down on your trade in, it’s risky to finance another car.
Private Buyers Who Trust You
You’ll get the best price for your car if you sell to a private buyer who wants to own and drive the car. If the buyer trusts you, it may be as simple as selling the car with the understanding that the title is not yet available. This is somewhat risky for the buyer, but if you document everything, it’s not the worst idea in the world. You can hand over the keys, pay off the loan with sales proceeds, and sign the title over after you get it from your lender (which may take several weeks). You can also ask your buyer to pay the lender directly if that feels more comfortable, but this still requires substantial trust.
If you’re upside-down on your loan, you’ll have to supplement the buyer’s payment with funds of your own.
You may be tempted to simply have the buyer take over your payments and leave the existing loan in place. However, this is generally a bad idea – you're still responsible for the debt until it's paid off (no matter who has the keys).
A Trip to the Bank
With a more skeptical buyer, you might need to schedule some time to visit your bank together (assuming your lender has local branches). Your buyer can bring funds to pay off the loan, and you can simultaneously get a clear title and sign it over to the buyer. This takes some planning and a buyer who is willing to go through all of this with you. Call your bank ahead of time to make sure the necessary documents (such as your title) and staff members will be available when you go to the branch.
Trusted Third Party
Another option is to use a neutral intermediary (that both of you trust) to make sure that the deal goes smoothly. Escrow services can protect both buyers and sellers, and you can even use an online escrow service to facilitate the deal: If the buyer doesn't pay, you keep the title. If you don't deliver the title and the vehicle, you don't get any money. The key is to find a third party that is affordable and easy to work with.