Private party sales can be tedious and frustrating under the best of circumstances. That’s doubly true if you’re trying to sell a car that still has a loan against it. But fear not—it is possible to sell a finance car as long as you’re willing to jump through a few extra hoops to make the sell happen. With a little effort and forethought, it’s altogether possible to weave your way through the red tape and make sure the sale is legal and 100 percent above board.
When you take out a car loan, the lender holds the title to the vehicle until you pay it off. You may receive a certificate of title on the vehicle, but it will have an indication somewhere on the title of the lienholder. A so-called "clear" title is one that has no lienholder or other encumbrances. You need a clear title to sell a financed car or to use the car as a trade-in on another vehicle, whether new or used.
A primer on how to sell a car with a loan can help you understand what’s needed to make this transaction a reality. The steps for selling a car that's still financed differ depending on whether you're selling your vehicle to a third-party or taking it to the dealership to exchange it for a newer model, which is mainly selling your car to the dealer.
Determining Your Car's Payoff Amount
No matter who's buying your car, your first order of business should be to find out how much you owe on your car loan. This figure is known as the payoff amount. You need to know this figure to pay off the remaining balance on the loan before transferring the title to its new owner. To get this figure, you will need to call your bank, credit union, or other lender or check your details online if you have that option.
Keep in mind that the payoff amount may end up being more or less than the total amount of your remaining loan balance, and your car’s Kelley Blue Book value may be more or less than your payoff amount too. Some lenders penalize borrowers who pay off their car loans early; if this is the case, your payoff amount may be more than the total sum of the monthly payments you have left on the loan once penalties and fees are tacked on. Other lenders reward borrowers who pay them early with a reduction in the amount of interest owed on the note. Whether your lender penalizes you for an early payoff or shaves interest off your total amount due varies widely by lender, so check your loan terms or reach out to your specific note holder to find out how they calculate your payoff amount.
Selling a Car With a Loan To a Private Buyer
Your buyer will want an unencumbered car title, and a clear title is necessary before you can make the title transfer. In most instances, the buyer will pay you, you will pay the lender the payoff amount, and you'll pocket the rest.
If your loan is at a local bank, you can meet at the lender's location, accept the funds from the buyer at the location, and then sign the title over to the buyer from there.
Because it can take several weeks for the title to arrive after you have made the sale, your buyer may feel more comfortable paying the lender directly, since they will be buying a car for which the title is not available yet. That takes some trust on the part of the buyer, and may not be legal in your area, so check with the DMV to make sure you can proceed with the sale. Be sure to document everything, which protects both you and your buyer, before handing over the keys.
Once you know the payoff amount, you need to inquire with your lender about the documentation that they need from you to complete your auto loan and clear the title. Check with the local motor vehicle authority or Department of Motor Vehicles to determine what type of paperwork they need you to complete for you to sell the vehicle once you have clearance from your lender.
In some states, you may need to provide your buyer with a bill of sale that details the car's sale price and a liability release that releases you from any liability that may occur with the vehicle if something happens after you transfer the title. These should be filed with the DMV if required. Consult with your local DMV to determine the exact requirements in your specific location. Be aware that your lender may require you to present them with a cashier's check for the payoff amount. Other lenders may offer options for payment such as debit or credit cards.
Auto Loan Assumption
Another option is to allow another person to "take over" your auto loan. In a typical auto loan assumption, the seller asks for a specific amount to enable the buyer to assume the loan; for example, the buyer pays you $3,000 and takes over the loan.
But that is not an option with all lenders, but many do offer loan assumptions. The buyer will need to be approved for the remaining payoff on your loan to make this type of arrangement work or take out a personal loan to cover the sales price.
From the buyer's standpoint, an auto assumption works much like a new auto loan. The lender will pull the potential buyer credit report and get their credit score. The buyer will need to go through the application process as usual. That means providing information on income for the lender to judge the buyer's ability to pay the loan. The lender will draw up a loan agreement, and ownership of the car will be transferred to the buyer.
Keep in mind that if you allow someone to take over the payments on your car, it must be done legally (which protects your interests). Letting someone take over your auto loan absent approval by your lender may lead to negative consequences. For example, if they don't pay the payment, they are not legally bound to do so. There may also be ramifications with your insurance provider if the person taking over the loan is involved in an accident.
Trading In Your Still-Financed Car
As you can see, selling a car to an individual when you are still paying for the vehicle can be a complicated process, and that's putting it mildly. It is much, much easier to trade in a car that's still under a financing agreement to a dealer as opposed to selling it to a private party. When you trade your vehicle in, the dealership pays off the loan on your behalf, so you don't have to worry about that awkward period between selling the car and getting the title. The dealer also handles the paperwork, including the transfer of the car's title, so you don't have that hassle to deal with either.
To trade in your still-financed car, you will need to bring a few things along with you on the day of your trade-in. Come prepared with your loan info, including your account number and the payoff amount. To transfer ownership, you'll also need the vehicle's registration, your driver's license, proof of insurance, and the keys and remote key fobs for the car, if any. You should also know the odometer reading on the car.
Be prepared for negotiations with whatever salesman you work with when doing a trade-in. Knowing what your car is worth is essential, since sales associates work on commission, and the more they can get out of the vehicles they sell, the more they make. Inversely, the less they give you for your trade-in, the more they make. There will likely be some back and forth on both accounts: the cost of your new car and the trade-in value that the dealership assigns to your old car. To get the best price for your trade-in, it is good practice to negotiate for the trade-in value and the cost of the vehicle you plan to buy separately.
Positive Equity and Your Trade-In
When determining how much your trade-in is worth, the dealer will look at how much your car is valued at as opposed to how much you still owe on it. If you owe $5,000, and your vehicle is valued at $9,000, then you have $4,000 in positive equity. That amount can be applied directly to the cost of your new car, reducing its overall purchase price and serving in some instances as your down payment.
Positive equity is subtracted from the price that you negotiate for your new vehicle purchase. You can add more money as a down payment (and may be required to, depending on your circumstances and your lender's demands) to drive off with your new wheels.
The trade-in value of your car will be shown on your contract, and it is a good idea to check that you are given the full credit you agreed to during negotiations when before you sign.
Upside Down Car Loan?
On the flip side of positive equity, you'll find its ugly cousin, negative equity. If you have negative equity in your car like around one-third of all borrowers, then your loan is said to be an upside down or underwater car loan. Simply put, this means that you owe your lender more than your car is worth based on its current market value. Can you still sell it or trade it? Maybe.
To determine if your car loan is upside down, subtract the payoff amount on the car from the amount you still owe on it. If your vehicle has a Kelley Blue Book value of $15,000, and you owe $17,000 on the car, then there is an underwater amount of $2,000. That presents some particular problems that may be overcome by working with your lender or paying the amount of negative equity from your pocket.
Depending on your credit, you may be able to roll the negative equity into a new car loan. Refinancing what you still owe along with the price of your new ride will increase the total amount you finance, which increases your monthly car payment amount.
There are also some dealers who offer trade-in promotions that will pay off your car no matter how much you owe on it. These dealers want to get you through the door and sell you a new car. For someone underwater on a car loan, this type of offer can be a lucrative one.
Trading a Car Versus Selling It
When it comes to getting the most out of your used car, is it better to trade it in or should you try to sell it yourself? There are definite pros and cons to both.
Trading it in, as you can see above, is the simplest way to get rid of the car, especially with a lender's lien still attached. The process is much faster, and the dealership handles the paperwork. Drive your old car in and drive away with a new car. Easy, peasy.
However, trading your car in usually equates to losing at least some money. The car dealer will never give you the true value of the car. He only makes money when he sells the car for more than he has in it. You stand to lose hundreds (maybe even thousands) of dollars by trading in a vehicle instead of selling it yourself.
Even so, the 2020 pandemic saw a surge in the demand for used cars due to more folks foregoing ridesharing and looking for affordable vehicles of their own. This ongoing uptick in car dealerships’ need for used car inventory may give car owners bigger bargaining power when selling used cars.
In nearly every instance, you will get more for your car through a private party sale. Buyers are more willing to pay closer to the actual value of the vehicle than dealers since they don't have to factor in any markup on the car.
However, for that extra cash from a private sale, you give up a lot of time, including the time it takes to advertise the car via Craigslist or other services, field inquiries, and arrange test drives and inspections. Then, there's also the time and trouble it takes to find a buyer who is willing to go the extra mile with the payoff issue that you'll face before getting a clear title for the car.
The bottom line is that when you have an outstanding loan on a car, it can be more hassle than it's worth to complete a third-party sale. With all the steps and legalities to consider, it may be a better option to trade your car in or wait to sell it once you have paid it off. However, if you find a buyer who understands the process and is willing to go through a few extra steps to own the car, you will likely get closer to your car's value by holding out for a private party sale.