If you want to sell a car that has a lien on the title, you’ll need to take a few extra steps. If you trade your car in with a dealer, they’ll handle the process. If you sell to a private party, you’ll need to handle getting the lien released. You can do this at the lender’s office or hire an escrow company to help. If you have negative equity in the car, you’ll need to be able to pay it off to get the lien released.
Written by Attorney John Coble.
Updated November 29, 2021
What do you do when you need a new car, but you still owe on the car you have? Just because you owe money on a car doesn't mean you can't sell it. But you'll have to go through some extra steps that aren’t required for cars that are paid off. Even so, selling a car that has a lien is not that difficult. This article explains how to handle a private sale or trade-in to a dealer when you still owe money on your car. We’ll also give you some tips to protect your interests during the sale.
How Car Liens Work
When you borrow money to buy a car, the lender places a lien on the car. The lien gives the lender the legal right to take the car if you fail to make your payments as agreed in the loan contract. That’s because the car is serving as collateral to the loan. If the lender repossesses the collateral, they'll be able to sell the vehicle to recoup their costs. When you purchase a car this way, the creditor’s name is listed on the title as a lienholder.
While you’ll be the one driving the financed vehicle, the lienholder — the auto loan company— technically owns the vehicle until you pay off the loan. In most states, the lender holds the car title and doesn't transfer it to you until the last loan payment is made. In some states, you have the vehicle title while repaying the loan. Once the loan is paid off, the lienholder will be removed from the title. You’ll be issued a new title that only has your name on it, which you can register with the Department of Motor Vehicles (DMV).
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How To Sell a Car With a Lien on the Title
Selling a car that doesn't have a lien is easy. You check the value of your car with a site like Kelley Blue Book, advertise that the car is for sale, show it to potential buyers, agree on a price, and do the necessary paperwork to transfer the title. If you're doing a trade-in with a dealer, the deal will usually handle these steps. You'll get a higher sale price with a private sale than a trade-in, but a private sale requires more work from you.
Selling a car that does have a lien is more complicated. If your car hasn’t been paid off, you’ll need to deal with the lien as well as make the sale. To legally sell a car that has a lien, you’ll need to get the lienholder to release the lien. Start by contacting the lender and asking what your pay-off balance is. You should also ask the lender what procedures are required to do a title transfer on your vehicle.
If the payoff amount is more than your car's private sale value, you'll have to pay the lender some cash to make the sale. If the payoff balance is more than the car's trade-in value, you'll probably have negative equity on your new car loan. This will be explained in more depth in the paragraphs below.
Selling Your Car to a Dealership...
If you want to trade in a vehicle with a lien at a car dealership, the dealer will usually handle the steps to pay off the lien to clear the title. This includes paying off the loan and handling the title transfer. You'll pay a price for this convenience though by getting less money for your vehicle from the dealer than what a private buyer would pay you. It's a good idea to make sure you understand the steps the dealer is taking to clear the vehicle’s title. Remember, you can be held responsible if the old lien isn't properly paid off.
You should know the total amount the dealer is giving you for the trade-in. If the amount they pay for the trade-in is less than what you owe on the car, this means you have negative equity. Since you owe more than the car is worth, you'll have to pay the difference to have a clear title transfer. Sometimes the dealer will pay the difference then add that amount to your next car with them. While this may sound convenient, it’ll cost you in the long run. You’ll have a larger monthly payment and pay more in interest over the life of the loan. Consider the example below:
|Car Payment w/ Negative Equity||Car Payment w/o Negative Equity|
|Price of New Car||$15,000.00||Price of New Car||$15,000.00|
|Amount Owed on Old Car||$9,000.00||Amount Owed on Old Car||$9,000.00|
|Trade-In Price of Old Car||-$6,000.00||Trade-In Price of Old Car||-$9,000.00|
|Negative Equity added to new loan||$3,000.00||Negative Equity added to new loan||$0.00|
|New 5 Yr Loan @ 9% w/ Negative Equity||$18,000.00||New 5 Yr Loan @ 9% w/o Negative Equity||$15,000.00|
|Total to be Paid w/ interest||$19,719.00||Total to be Paid w/ interest||$17,400.00|
|Monthly Payment||$374.00||Monthly Paymen||$311.00|
|Increased Monthly Payment due to Negative Equity||$63.00|
|Increased interest paid due to negative equity||$780.00|
In the example above, with the negative equity added to your new loan, you'll be paying an extra $63/month over the next five years. And you'll pay an additional $780 in interest over the term of the new loan.
There are two ways you can eliminate or reduce the negative equity. First, you could negotiate a better trade-in allowance. In the example without negative equity, you'll see that the trade-in was just enough to eliminate the negative equity. Unfortunately, the dealer probably isn't going to give you more for the trade-in than your car is valued according to Kelley Blue Book, Edmunds, or NADA. Your other option is to make a down payment to cover the amount of the negative equity. This way, you get rid of the negative equity instead of bringing it into your new loan.
Selling Your Car to a Private Party…
You'll get more money if you sell your car to a private party than if you trade it to a dealership. The dealership wants to make a profit from reselling your trade-in, so it must pay you the least amount possible. But if you have a lien on your vehicle, selling to a private party is more complicated. It's not as simple as the buyer taking over the payments.
Selling a car with positive equity...
If the proceeds of your private sale will bring enough money to pay off the lien, the process will be easier. That means you have positive equity in the car you're selling. In this case, you and the buyer will meet at your lender’s office, and the buyer will either pay you or the lender. If the buyer pays you, you'll then pay the lender with the proceeds and keep anything that’s left. Then you and the lender sign the title over to the buyer, and the lender sends a lien release to the DMV.
Selling a car with negative equity...
If the proceeds from the private sale aren’t enough to pay off the loan, things are trickier because you have negative equity. Just as in the example with positive equity, you can meet at your lender's office, and the buyer can give you or the seller the money to purchase the vehicle. But for the lender to remove the lien, they'll expect you to pay the difference. For example, if you sell a car for $8,000 but still owe $10,000 on the vehicle, the lender is going to require you to pay $2,000. If you can’t pay the $2,000, the lender won't allow the sale.
What if the buyer or lender is in another city? In this case, you can have an escrow service handle the transaction. The buyer pays into an escrow account and when you give the car to the buyer, the escrow company transfers the money to your lender to pay off the loan. If there's positive equity, the escrow company will send you the excess. If there's negative equity, you'll need to deposit cash into the escrow account. The escrow company will send that money with the buyer's money to the lender. Then the car title will go to the new owner or the buyer's lender.
Using an escrow account protects you, the buyer, and the lender(s). Escrow companies have become more common in the days of internet loans and internet car sales. Some of these companies have turned out to be shams. It's a good idea to check with the Better Business Bureau and the attorney general’s office in your state to make sure the escrow company is reputable.
When you use a loan to purchase a vehicle, the lender will usually have a lien on your car, which gives them legal rights. If you fail to make payments, the lender will exercise its rights under the lien and repossess the car.
When it comes time to sell the car, you can’t legally do so without paying off the lienholder. If you do a trade-in with a dealer, the dealer will handle the paperwork, but you need to make sure you understand the terms. It’s best not to have negative equity rolled into a new loan. It’s more complicated when making a private sale, but you’ll usually get a higher selling price. You can use an escrow company to help transfer the vehicle’s title. But if you have negative equity, you’ll need to be prepared to pay that amount off so the lien can be released.