Can You Sell a Car You’re Financing?
Understand how to sell a car with an active loan. Learn the financial considerations and procedural steps for successful private or dealership sales.
Selling a car with an outstanding loan is possible, but it involves specific steps because the lender typically holds a lien on the vehicle. This lien means they have a legal claim until the debt is fully satisfied, requiring the lien to be released before ownership can be transferred.
Understanding Your Loan and Title
When you finance a car, the lender, or lienholder, maintains a legal interest in the vehicle, typically recorded on the title or held as an electronic lien. Before selling, gather precise information about your loan.
Determine your current loan balance through your online account, statements, or by contacting your lender. The most crucial information is a payoff quote, which provides the exact amount to satisfy your loan on a specific date, including accrued interest and fees. This quote differs from your current balance because interest accumulates daily. Payoff quotes are typically valid for a short period, often 7 to 10 days.
Once the loan is paid, the lender will release their lien, formally acknowledging the debt is satisfied. Receiving the physical title or confirmation of lien release can take time, often 10 business days for the lender, plus additional weeks for state motor vehicle departments to mail an updated title. Without this release, you cannot legally transfer ownership.
Selling to a Dealership
Selling a financed car to a dealership, either as a trade-in or direct sale, simplifies the process. Dealerships regularly handle vehicles with existing loans and are equipped to manage the necessary paperwork and financial transfers.
The dealership appraises your vehicle to determine its market value. After agreeing on a value, they obtain a payoff quote from your lender. This payoff amount is subtracted from your car’s value. If the value exceeds the payoff, the difference can be applied towards a new vehicle or paid to you.
The dealership directly sends the payoff amount to your lender. This means you avoid managing fund transfers or waiting for the lien release. The dealership assumes responsibility for settling the loan and obtaining the title, streamlining the process.
Selling to a Private Party
Selling a financed car to a private party requires more direct involvement from the seller in managing the loan payoff and title transfer. This method may yield a higher sale price than a dealership trade-in, but demands careful execution for a smooth transfer.
Obtain a precise and current payoff quote from your lender, valid for a specific number of days. Clearly communicate this amount and the transaction process to potential buyers. The buyer pays you the agreed-upon price, and you must immediately use a portion of these funds to pay off your loan. Use secure payment methods like a cashier’s check, certified check, or wire transfer.
After you pay off the loan, your lender will process the lien release. This can take approximately 10 business days. Following this, the physical title or an electronic confirmation of the lien release will be sent to you or directly to the state’s motor vehicle department, which may then mail the clear title to you. This entire process, from payoff to receiving a clear title, can range from a few weeks to over a month.
It is important to wait until you have the clear title in hand or confirmed its electronic release before signing over ownership to the buyer, as they cannot register the vehicle without it. Some financial institutions may allow the transaction to occur at their branch, where the buyer’s payment can be directly applied to the loan, and the lien release initiated simultaneously, providing a more secure and expedited process.
A bill of sale is a necessary document for a private sale, detailing the vehicle identification number (VIN), make, model, year, sale price, odometer reading, and the names and signatures of both the buyer and seller. This document formalizes the transaction and protects both parties.
Addressing Negative Equity
Negative equity occurs when your car loan balance exceeds the vehicle’s current market value, often called being “upside down” or “underwater.” For example, if you owe $15,000 but your car is worth $12,000, you have $3,000 in negative equity.
If you have negative equity, selling your car requires you to pay the difference between the sale price and your loan payoff amount out-of-pocket to fully satisfy the loan. The lender will not release the lien until the entire loan balance is cleared, meaning you must bring additional funds to cover the shortfall.
When trading in a vehicle with negative equity to a dealership, one option is to roll the negative equity into the financing for a new car. This involves adding the outstanding balance from your old loan to the principal of your new car loan. While this can provide a convenient way to transition to a new vehicle without an immediate out-of-pocket payment, it increases the total amount of your new loan and, consequently, the interest paid over the loan’s term. This option should be carefully considered due to its long-term financial implications.