Can you sell a car under finance?

Updated On September 21st, 2022By Dynamoney

Car finance can be a great way to own a car sooner rather than later, especially if you don’t have the money to buy it outright. Selling a car under finance can be more difficult particularly if your loan isn’t fully paid off at the time of sale. If you are planning to sell a car that still has car finance owing, it is important to understand the ins and outs, so that you can successfully sell your car whilst it is still on finance.

Why is selling a car on finance more complicated?

When trying to sell a car under finance, what it really comes down to is how a car loan is structured. Most car loans use the car being financed as security against the loan in the event you don’t pay your car finance repayments. This means if you fail to make the repayments as required, the lender can take possession of your car and sell it to regain the money you owe. In some cases, a car lender will allow you as the borrower to swap one car for another, but often the lender will require the existing car loan to be paid off and closed if the car in question is sold.

What does under finance mean?

When a car is under finance or ‘on finance,’ it usually means there is an outstanding car loan against it. With a secured loan the loan is applied to the car, not the buyer. As the buyer, you are responsible for repaying the car loan, but because the car forms the basis of the secured loan, the outstanding balance will always be against the car itself. This is known as an encumbrance.

If your car loan is unsecured, meaning the car is not being used as collateral on your loan, you can sell the car without any restrictions as the car is not being held as security against the loan. You will however be required to maintain your loan repayments if the sale price does not fully cover paying out the loan. Most car loans tend to be secured which can be harder to sell under finance.

Is the car you’re selling encumbered?

If you are selling a car under finance there is a good chance it is also encumbered, meaning that you still owe money against it, and you don’t own the car outright. Let’s say you took out a $50,000 car loan to purchase your new car. After five years you still owe $15,000. In this case, your car is encumbered by $15,000.

Once you pay off the remaining $15,000 you would own the car outright. It is important to note that a car is only encumbered if it is being used as security against the loan. If the outstanding loan is unsecured, then it wouldn’t be unencumbered as it cannot be taken back by the lender in the event of non-repayment.

I’ve decided to sell a car under finance, what is involved?

Selling a car on finance happens all the time. Most lenders won’t have an issue with you selling your car under finance, but you will firstly need to talk to your lender or bank to let them know you are planning on paying out your existing car finance before you sell your car. It is also a good time to confirm the exact amount you still owe on your car loan.

Be aware that anytime you break a car loan early, there will be fees and charges involved. These vary from lender to lender, but typically there will be an administration fee, break fee and a cost recovery fee. It’s wise to check all the fees and charges upfront before proceeding with selling a car on finance.

In most cases, unless you have the money available to pay out the existing car loan, you will need to use the sale amount to pay your lender. When this happens, the sale is usually completed through the lender as the money will go straight from the buyer to paying your car loan out.

For example, if you are selling the car you purchased originally for $60,000 for $40,000, and you have $15,000 left owing on your car loan, you would be expected to use part of the sale amount to pay out the remaining $15,000 if you didn’t already have the extra cash to do so.

In some cases, your car loan might be higher than what the car is worth which will require you to pay the difference. Once you have done this the bank is able to remove the encumbrance from the car so that the new buyer can take possession with a clear title.

Important things to do when selling a car

If you are selling a car under finance, you should tell any potential buyers upfront that the car is still under finance. Being upfront from the get-go means they are less likely to be put off, as most buyers will find out anyway through conducting a Personal Property Securities Register (PPSR) search online. If a buyer decides to purchase your car while it is still encumbered, you will need to pay off the remaining amount owing against the car and transfer the registration title of the car into their name. It is also your responsibility to provide them with proof of sale.

When selling a car on finance you will want to get the best price possible as this will help you pay off your remaining debt and if there is enough left over can also be put towards financing your next car purchase. To ensure you obtain the best possible price it is important to:

• Service your car regularly
• Replace the tyres
• Fix any chips, scratches, cracks or damage
• Thoroughly clean and polish the exterior and interiors
• Have a full tank of fuel

If you are planning on selling a car under finance, if possible, it is often far easier and better to pay off the loan before you proceed to sell, as it removes a lot of the challenges and headaches. If you are looking to upgrade to a new vehicle and would like to find out more about the range of car finance options we offer, contact the team at Dynamoney today.