Can You Sell a Vehicle That Is Financed?
Considering selling your financed vehicle? Learn the practical steps involved to successfully transfer ownership and manage your loan.
A financed vehicle refers to an automobile for which a loan is still outstanding, meaning a financial institution holds a legal claim to the vehicle. Many people find themselves in this common situation when they wish to sell their car. The straightforward answer to whether you can sell a vehicle that is financed is yes. However, the process involves specific steps and considerations due to the existing loan.
Understanding Your Financed Vehicle
When you finance a vehicle, the lender, typically a bank or credit union, becomes the “lienholder” and holds a legal claim, or lien, on your car until the loan is fully repaid. This means the lienholder retains the vehicle’s title, the official document of ownership, until the outstanding balance is satisfied. The lien protects the lender’s interest, allowing them to repossess the vehicle if loan payments cease.
Understanding your loan’s payoff amount is important, as this is the total amount required to satisfy the debt, including any accrued interest and fees up to a specific date. This amount can differ from your current principal balance shown on a monthly statement. Lenders provide a “good-through” date for payoff quotes, after which the amount may change due to daily interest accrual.
Assessing your vehicle’s equity is another key step. Equity is the difference between your car’s current market value and the loan payoff amount. Positive equity occurs when the vehicle’s market value exceeds the payoff amount, leaving you with funds after the sale. Conversely, negative equity, also known as being “upside down,” means you owe more on the loan than the car is worth, a common scenario given rapid vehicle depreciation.
Options for Selling a Financed Vehicle
When deciding to sell a financed vehicle, several options are available. Selling to a private party is one common method. In this scenario, the buyer typically pays the seller, who then pays off the outstanding loan directly to the lienholder. Once the loan is satisfied, the lienholder releases the title, allowing the seller to transfer ownership to the buyer.
Another option is trading in the vehicle at a dealership, often chosen when purchasing a new car. Dealerships handle the existing loan payoff as part of the trade-in transaction. If the vehicle has positive equity, the dealership applies that amount towards the new vehicle purchase. However, if there is negative equity, the dealership may allow the remaining balance to be rolled into the new car loan, increasing the principal and potentially leading to higher monthly payments for the new vehicle.
Alternatively, you can sell the vehicle directly to a dealership or an online car buying service. These entities purchase the vehicle outright and directly manage the payoff with your lienholder. After the loan is settled, any remaining positive equity is issued to you. This method simplifies the transaction, as the buyer handles much of the administrative work for lien release and title transfer.
Steps to Complete the Sale
Regardless of the chosen selling method, several steps are necessary to complete the sale of a financed vehicle. First, contact your lienholder to obtain an accurate loan payoff amount. This payoff quote includes all principal, interest, and fees, and typically comes with a “good-through” date, after which the amount may change. Confirm the precise instructions for submitting the payoff, as some lenders require certified funds like a cashier’s check.
Once the loan is paid in full, the lienholder releases their lien on the vehicle. This process involves the lienholder sending the physical title, or an electronic lien release notification, to you or directly to the state’s motor vehicle department. The time frame for receiving the lien release or title can vary, taking 2 to 3 weeks for paper titles, or up to 7.5 to 9.5 weeks for electronic titles, depending on the lender and state processing times. Some states maintain electronic titles, requiring the Department of Motor Vehicles (DMV) to issue a physical, lien-free title upon request once the lien is released.
With the lien released and the title secured, the next step is to transfer ownership to the buyer. This involves signing over the vehicle’s title, completing the odometer disclosure statement, and in some jurisdictions, having the signatures notarized. A bill of sale is also an important document for both parties, detailing the vehicle’s information (VIN, make, model, year), the sale price, and the names and addresses of both the buyer and seller. This document serves as legal proof of the transaction.
Correctly handling funds ensures a smooth ownership transfer. If selling privately, the buyer’s payment satisfies the loan payoff amount, and any positive equity is retained by the seller. If the sale price is less than the payoff (negative equity), the seller must provide additional funds to cover the deficit. After the sale, notify your state’s motor vehicle department by submitting a release of liability form. This protects you from future parking tickets, traffic violations, or accidents involving the vehicle. Concurrently, you should contact your insurance provider to cancel the policy on the sold vehicle.