Selling a Car With a Loan: Processes and Options
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Before a car that is not yet fully paid for can be sold, the lender's legal claim to the vehicle must be cleared. Paying off the remainder of the loan balance will clear that claim. A prepayment penalty may also become due if the loan is paid off early. If paying the balance remainder isn't an option, the borrower can speak with the lender about transferring ownership. If the lender is also an auto dealer, a trade-in opportunity may be available.
Written by Chiara King.
Updated November 30, 2021
There are many reasons you may want to sell your car before you've paid off your auto loan. Maybe you got a job with a longer commute and you want better gas mileage. Or maybe your family is growing and you need a larger vehicle. You may even move to a new location where you don't need a car at all. But can you sell or trade in your car if you haven’t paid off your car loan?
The answer is yes, but the process is a little more complicated than selling a car you own outright. This article covers how to sell a car that's still being financed and how to get the best value on the sale. We’ll also look at the difference between selling a car with positive equity and selling one with negative equity.
Can You Sell a Car With an Existing Loan?
It’s possible to sell your car when you still owe money on it, but you’ll need to deal with the lender’s legal claim on the car first. When you have a loan on a car, your lender is a lienholder with a legal interest in your vehicle. They may appear on your car’s title or may even hold your title so you can’t sell the vehicle to a buyer without first paying off the loan or addressing the lien. The easiest way to deal with the lender’s claim is to pay off the auto loan. This will simplify the sale process a lot.
To pay off your auto loan balance, you could get an unsecured personal loan, take a loan from your retirement account, use a tax refund, or borrow money from friends or family. Each of these options has its pros and cons. For example, a personal loan will probably have higher interest than your auto loan, but it may be easy to get if your payoff amount is small.
If you can’t find the money to pay off the loan, you still have a few options. You may be able to have the buyer take over the loan or you may be able to roll the amount you still owe on the loan into a new car loan if you trade in at a dealership.
How To Sell a Financed Car
Once you’ve decided to sell your financed vehicle, the first and most important step is to contact your loan servicer. If you’re trying to sell your car because you can’t afford the car payment anymore, ask the lender if they can adjust the terms of your loan contract to make your payment more affordable. Refinancing may also be an option. When you refinance, you take out a new loan to pay off the old loan. Refinancing may help you lower your interest rate or your monthly payment.
If you don’t want to change the loan and you just want to sell the car, you’ll still want to contact the loan servicer to ask how to properly transfer ownership. Your loan servicer will tell you exactly how to handle the sale, what the payoff amount is and how to pay it, and whether you’ll be charged a prepayment penalty for paying off the loan early.
If your lender is a local bank, you may be able to bring the bill of sale to the bank to sign the transfer paperwork over to the buyer directly in person. An online loan servicer might direct you to one of the bank’s affiliates or another financial institution or it may require you to fully pay off the loan before it releases the title.
Determine the Payoff Amount on Your Loan
When you call your loan servicer, you’ll need to ask for your payoff amount. This isn’t the same as the current loan balance on your monthly statement. The payoff amount includes the interest that’s accumulated on your loan from the statement date until the day you intend to pay off the loan, plus any extra fees from the lender. Payoff quotes always have an expiration date, which is commonly called a “good through” date. If you haven’t paid off the loan by the expiration date you’ll have to request another payoff quote.
It’s ok to get a verbal payoff quote from your loan servicer over the phone as you begin thinking of selling your car. But as you get closer to the sale, you’ll want to get a written payoff quote so that it’s legally binding and you know the exact amount required to close out the loan.
Determine Your Car’s Value
Next, you’ll want to find out how much your car is worth and whether you have positive or negative equity. Equity is the value of an asset (in this case, the car) minus all the loans on that asset. You can determine how much equity you have in your vehicle by subtracting your loan payoff amount from your car’s value.
If the result is positive, you have positive equity in your vehicle. This means you’ll get cash after the car is sold and the loan is completely paid off.
If the result is negative, you have negative equity in your vehicle. This means if the car is sold at the current market value, it won’t be enough to fully repay the loan, and you’ll still owe money. This is also called being upside-down or underwater.
You can determine your car’s value by using online tools like Kelley Blue Book and Edmunds. You may be able to sell your car for more than the market value or you may need to sell it for less. This partly depends on how you sell it. Generally, you get more money in a private sale than you get from trading in your car to a dealer.
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How To Sell a Car With Positive Equity
If you have positive equity in your vehicle, it will be easier to sell than if you’re upside-down on your loan. Again, having positive equity means that your car is worth more than what you owe on the loan. So if your car is valued at $10,000 and you owe $8,000 on the loan, you have $2,000 in positive equity. With positive equity, you have several selling options.
Sell It in a Private Sale
Private sales can be handled in two ways. First, the buyer can pay the total sale amount to the loan servicer. Then the servicer pays you whatever’s left from the sale proceeds after the loan is paid off. Second, the buyer can pay your lender the balance you owe on the loan then pay you the remainder of the sale price. Using our previous example, if you’re able to sell the car for its $10,000 value, the buyer would pay the bank the $8,000 you still owe on the loan and give you the remaining $2,000.
In either case, you and the lender then sign the title over to the new owner. Then the new owner needs to go to the state’s department of motor vehicles to get a new registration and title.
You can streamline the process by paying off the loan before the sale so that you have the car title in hand on the sale date. If you have good credit, you might be able to get a personal loan to pay off your auto loan before the sale. But if you go this route, you’ll want to pay off the personal loan as soon as possible so you don’t have to pay interest on the loan.
Do a Dealership Trade-In
If you trade your vehicle in at a car dealer, the dealer will handle the paperwork to transfer car ownership. The main drawback to doing a trade-in is that you won’t make as much money as you would in a private sale. But if you have positive equity, you may be able to use that amount as a down payment on your new car.
If you decide to do a trade-in, go into the dealership prepared, especially if you plan to get a new car loan. Check your credit score and, if possible, get preapproved for an auto loan from a financial institution you trust. Research the market value of your car as well. Having this information will help you know if you’re being treated fairly or if you need to find another car dealer.
Sell Your Car to a Used-Car Dealer
You can sell your car to some used car dealers without having to make a purchase. You could do this if you’re not ready to buy a new car but you want to get rid of your old car. Before you offer to sell your car to a dealer, look up your car’s value and get it ready for sale by cleaning it and fixing any small maintenance issues. The dealer’s offer will be based on your vehicle’s condition and the auction price of similar vehicles. Like with a trade-in, you probably won’t get as much for the car as you would in a private sale.
Having a loan on the car probably won’t impact the car dealer’s offer, but it will slow down the process since the dealer will have to wait to get the title from your lender. After the dealer gets the title, they’ll write you a check for whatever’s left over after the loan payoff.
How To Sell a Car With Negative Equity
If you owe more on your car than it is worth, you have negative equity. You can still sell a car with negative equity, but it’s more challenging. If you’re upside down on a car loan, you’re responsible for paying the difference between the sale price and the loan’s payoff balance. This is true whether you sell the vehicle to a private party or a dealer. If you don’t have enough savings to cover that difference but your credit score is good, you might be able to get a loan from your bank or credit union to cover it. Unsecured loans tend to have higher interest rates than auto loans, so you’ll want to pay off this loan as soon as possible after the sale.
Selling a Car With Negative Equity to a Private Party
In a private party sale, the buyer will pay the sale amount directly to the lender, and you’ll pay the remaining loan balance to the lender. Then you and the loan servicer will sign the title over to the buyer. If you have enough savings or can get an unsecured loan to cover the entire loan payoff, you can get the title transferred into your name ahead of time to simplify the sale process.
Selling to a Dealership When Your Car Has Negative Equity
If you go to a dealership to trade in your current car for a new car, the dealer may offer to wrap the negative equity amount into the loan on your new car. This may be tempting but it can hurt you financially as it can put your new car loan underwater. If you’re able to, you can address the negative equity at the time of the car sale by paying off the outstanding loan balance. If this isn’t possible and you don’t want to risk putting your new loan underwater by rolling the negative equity into a new loan, consider buying a less expensive vehicle that’s more affordable for your current budget.
Selling a car that has an auto loan can be challenging, but it’s possible. That’s because the lender has a legal claim to the car that must be cleared for you to sell the vehicle. The easiest path forward is to pay off the loan. If this isn’t possible, you still have options.
Contact the lender and ask about the process of transferring ownership. You should also ask for the payoff amount and if there are any prepayment penalties. Before you sell your car, you should also look up the car’s current market value. Comparing this to your loan payoff amount will help you see whether you have positive equity or negative equity. Selling or trading in a financed vehicle to a car dealer is easier because they’ll take care of the paperwork, but selling to a private party will usually get you more money.