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Can I sell my car before I pay off my loan?

Can I sell my car before I pay off my loan?

Generally speaking, a car loan is a long-term commitment that can last up to five years – and sometimes more. So, what happens if you find yourself needing to sell your car before you’ve paid it off?

It’s not unusual for circumstances to change, so for whatever reason you need to offload your car before the end of its loan term, it might be a relief to know that it is doable. There just may be a few extra steps in the process.

The obvious reason being that if you still owe money on your car, then it doesn’t fully belong to you.

If your car loan is secured against the car itself – which is likely, especially if it was purchased new – then the car is classified as encumbered. Buying an encumbered vehicle could be perceived as a considerable risk for a potential buyer, because if you failed to pay off the loan after selling them the car, the buyer could have their car repossessed.

This risk can be reduced or eliminated, however, if the transactions happen at the same time.

On the other hand, if you financed your car with an unsecured car loan, the onus to repay it will remain on you.

Either way, it’s important to be transparent with potential buyers when selling a car that’s under finance. Communicating how you plan to overcome any risk they may be faced with will allow them to have confidence in the purchase and in turn reduce the chance of losing their interest.

That said, it’s equally important for used car buyers to protect themselves by checking the Personal Property Securities Register (PPSR) before buying a car, to see if there are any security interests registered against it.

What steps should I take to sell my financed car?

Selling a car under finance can be a simple process if you know what steps you need to take. Consider the following to get you on your way:

Step 1: Reach out to your loan provider

Once you’ve decided that you want to sell your car, the first step you should take is to get in touch with your loan provider and tell them you’re planning to sell. You can then discuss what options you have when it comes to repaying the outstanding amount. Be sure to enquire about early repayment and exit fees and factor these into your total amount owing, to ensure you’re not left in an undesirable financial position after selling your car.

If you have enough money in savings to cover the outstanding amount plus any fees payable, you could potentially opt to pay it off before selling your car in order to remove the encumbrance and/or simplify the process.

Step 2: List your car for sale

After you’ve had a discussion with your loan provider, it’s time to list your car for sale. Consider taking the opportunity to disclose your car’s ownership status in the listing. If you withhold the information and an interested buyer looks the car up on the PPSR, they could think you are being dishonest, and you could lose the sale.

Step 3: Await an offer from a buyer

You might choose to wait until you receive an offer to let the buyer know that the car is under finance, and how you plan to pay it off. But again, this may lead the buyer to believe that you have been dishonest, and they may wonder if there are any other details about the car that you haven’t been transparent about.

If you have already discussed the car’s status with the buyer and are happy with their offer, you can then move forward with arranging the payment process.

Step 4: Complete the transaction

If you are planning to use the money that you receive from the sale of the car to pay off the loan, you should be able to do this all in one go at the bank with which your loan is held. This way, the buyer can be present to witness the loan being paid off before ownership is transferred into their name.

Keep in mind, if you have sold the car for less than the amount outstanding on the loan, you will be liable for meeting the gap before the transaction is completed. On the other hand, if you have sold the car for more, you should receive the excess once the outstanding amount has been covered.

Step 5: Transfer ownership

Once your loan has been repaid and the encumbrance on the car has been lifted (if applicable), the car can then be transferred into the new owner’s name. As the previous owner, you are responsible for submitting a notice of disposal within 14 days of the sale. The rest of the process is up to the new owner.

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This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.

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