How Do You Sell a Car You Still Owe Money On?

Selling a financed car is trickier than selling a vehicle you own free-and-clear – but it’s something that people do every day. The two key steps are to:

  1. 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).
  2. 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 First

First, ask your lender what you need to do to get rid of the loan and sell your car. You don’t have to reinvent the wheel – 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. They might have a local office where you and the buyer can meet, which would make the transactionmuchsmoother. Ask if there’s anything else you need to know about, such as prepayment penalties and an estimated processing time for sending the title.

The Payoff

You’ll need to know exactly how much you still owe your lender so that you can get a clear title. Technically, you probably won’t sell your car with the loan outstanding.

Instead, there’s a good chance that you’llunwind  the loanwhile(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.

Ideally, you’ll get a payoff letter, which is an official document from your lender.

These documents are helpful because they tell you how much your payoff amount changes from day to day. You might not know exactly when you’re going to sell your vehicle, and interest charges can change the amount of your loan from day to day. Armed with all the details, you won’t get caught by surprise.

The Title

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 hand over money unless you can provide a clear title – whether you have it in-hand or can clear things up during the sale.

Pay off the Loan?

If possible, the best thing to do is to pay your loan off long before selling the car. Get a clear title that you can simply sign over. 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, 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, it’s 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 – don’t just buy a more expensive car. Online lenders are a good place to look (including peer to peer loans), or just ask about personal loans at your local bank or credit union.

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 a car with a loan does not come for free, You’ll 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 (which 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 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.

Sometimes it's tempting to simply have the buyer take over your payments and leave the existing loan in place. However, this is generally a bad idea –you'restill responsible for the debt until it's paid off (no matter who has the keys).

A Trip to the Bank

With a skeptical buyer, you might need to schedule some time to visit your bank (assuming your lender has local branches). Your buyer’s money will 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.

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Category: Title

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