How to Properly Get Rid of a Financed Car

It is common for individuals to consider parting ways with a financed vehicle for various reasons. Financial circumstances can shift, making existing car payments difficult to manage. There might also be a change in personal needs, such as requiring a larger vehicle for a growing family or a more fuel-efficient option for a new commute. Understanding the available approaches to responsibly manage a financed car is an important financial step.

Understanding Your Current Car Loan

Before taking any action with a financed car, gather specific details about the existing loan. A primary piece of information is the current payoff amount, which represents the exact sum needed to fully satisfy the loan today. This amount includes the remaining principal, any accrued interest, and applicable fees, and it often changes daily due to interest accrual. Lenders can provide an official payoff quote, typically valid for a period like 10 days, which accounts for daily interest (per diem) and is much more precise than the balance shown on a monthly statement.

Understanding the original loan terms is also crucial, including the total loan duration and the interest rate. Review the loan agreement for any early payoff penalties. While not all auto loans have these, some lenders might charge a fee if the loan is paid off sooner than scheduled.

Finally, know who holds the car’s title. The lender, also known as the lienholder, typically retains the vehicle’s title as collateral until the loan is fully repaid. This lien gives the lender a legal claim to the vehicle, and its release is a necessary step in transferring ownership.

Options for Selling or Trading In Your Financed Car

Two common pathways for individuals looking to transition out of a financed car involve selling it to a private party or trading it in at a dealership.

When selling a financed car to a private party, the loan must be fully paid off to release the lien and allow for title transfer. The seller typically obtains a payoff quote from their lender, and the buyer’s funds are then used to cover this amount. It is often recommended to complete this transaction at the lienholder’s office, where the buyer can directly pay the lender, or the seller can pay off the loan beforehand. Determining a fair market value for the car using online valuation tools helps in setting a competitive sale price.

Alternatively, trading in a financed car at a dealership simplifies much of the process. Dealerships are accustomed to handling vehicles with existing loans and will typically pay off the old loan directly to the lienholder. The trade-in value of the vehicle is then applied towards the purchase of a new car. If the trade-in value exceeds the loan balance, the positive equity can reduce the cost of the new vehicle. If the loan balance is greater than the trade-in value, the dealership may incorporate this negative equity into the new car’s financing.

Alternative Strategies for Your Financed Car

Beyond traditional selling or trading, other strategies exist for managing a financed car.

Refinancing

Refinancing the existing car loan is a common approach to adjust the financing terms. This involves taking out a new loan to pay off the current one. Refinancing can potentially lead to a lower interest rate, which reduces the total interest paid over the loan term, or a lower monthly payment if the term is extended. A shorter loan term is also an option through refinancing, allowing for faster payoff.

Loan Assumption

Loan assumption occurs when another party takes over the existing car loan. However, most lenders do not permit loan assumption. If they do, the new borrower must undergo a credit check and qualify for the loan under its original terms. The process is similar to applying for a new car loan, requiring the new borrower to meet the lender’s criteria.

Voluntary Surrender

Voluntary surrender, also known as voluntary repossession, involves returning the vehicle to the lender because the borrower can no longer afford the payments. While it avoids the surprise of an involuntary repossession, it is still reported as a negative mark on a credit report. After the surrender, the lender sells the vehicle, and the borrower remains responsible for any deficiency balance, which is the difference between the loan amount and the sale price, plus any associated fees.

Addressing Negative Equity

Negative equity occurs when the outstanding balance on a car loan is greater than the vehicle’s current market value. This situation is common due to vehicle depreciation and can present a challenge when attempting to sell or trade a financed car.

One direct way to resolve negative equity is to pay the difference out of pocket. For example, if selling the car for $15,000 but owing $18,000, the borrower would need to pay $3,000 to fully satisfy the loan. This ensures the lien is released, and the title can be transferred to a new owner.

Another common method is rolling the negative equity into a new car loan. The outstanding deficit from the old loan is added to the principal of the new car loan. While this avoids an immediate out-of-pocket payment, it increases the total amount financed for the new vehicle, leading to higher monthly payments and more interest paid over the new loan’s term. This can also put the new car into a negative equity position from the start. A personal loan might also be an option to cover the negative equity, separating it from the new vehicle financing.

Finalizing the Car Transfer and Loan Payoff

Final administrative and legal steps are important to ensure the process is completed correctly. It is important to obtain a final, official payoff quote from the lender just before the transaction. This quote ensures the precise amount, including any per diem interest, is paid to close the loan.

The next step involves ensuring the loan is fully paid off. After the loan is satisfied, the lienholder will initiate the release of the lien. This process typically involves the lender notifying the state’s motor vehicle department, which then processes the clear title. The time it takes to receive a clear title can vary by state, ranging from a few days to several weeks.

Finally, the vehicle’s ownership must be formally transferred to the new owner. This usually involves signing the vehicle’s title over and completing any necessary state-specific paperwork for title and registration. It is also prudent to confirm with the original lender that the loan account is officially closed and there are no further obligations. Requesting a paid-in-full letter or confirmation of account closure provides documentation of the completed transaction.