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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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Learn more about car loans

How do you get a car loan?

There are four different ways you can get a car loan. You can go straight to a lender. You can get a finance broker to organise a car loan for you. You can get ‘dealer finance’ – which is when the car dealer organises a car loan for you. Or you can organise your own car loan through a comparison website, like RateCity.

Whichever method you choose, you will need to provide proof of identification, proof of income and proof of savings. So you may be asked for any combination of passport, driver’s licence, bank statements, payslips, tax returns and utility bills. You might also be asked to provide proof of insurance.

What is a car loan?

A car loan, also known as vehicle finance, is money that a consumer borrows with the express purpose of buying a vehicle, such as a car, motorbike, van, truck or campervan. Car loans can be used for both new and used vehicles.

What is a loan-to-value ratio?

The loan-to-value ratio, or LVR, is a percentage that expresses the amount of money owed on the car compared to the value of the car. For example, if you take out a $15,000 loan to buy a $20,000 car, you have a loan-to-value ratio of 75 per cent. Loan-to-value ratios change over time as you pay off your loan and your car depreciates in value. For example, two years later you might now owe $10,000 on your car, which might now be worth $15,000. In that case, although there would still be a $5,000 difference between the size of the outstanding loan and the value of the car, the loan-to-value ratio would now be 67 per cent.

What is vehicle finance?

Vehicle finance, also known as a car loan, is money that a consumer borrows with the express purpose of buying a vehicle, such as a car, motorbike, van, truck or campervan. Vehicle finance can be used for both new and used vehicles.

What is dealer finance?

Dealer finance is a car loan organised through a car dealer – as opposed to car loans organised by a finance broker or directly by the lender.

What is a dealership?

A dealership is a car yard or a place where cars are sold.

What is a loan term?

The loan term is the amount of time the lender gives you to repay the car loan. For example, if you take out a $20,000 car loan with a five-year loan term, you would be expected to pay off the entire $20,000 (plus interest) within five years.

Can you refinance a car loan with the same lender?

You may be looking to refinance your car loan to get lower interest rates or reduce the total monthly amount you have to pay. Often, this leads to the question ‘can I refinance a car loan with the same bank?’

While it’s always worth shopping around for a better deal or at least to compare offers from other lenders, you can sometimes refinance to a different loan with the same lender. It may be simpler,  as the lender already has your details and knows your repayment history. 

Having said that, knowing the terms offered by other lenders may help you negotiate a better deal with your current lender.

Should I service my own car?

There are also costs associated with vehicle ownership, such as paying for petrol and the obligatory ongoing maintenance. But should you cut down on costs by servicing your own vehicle?

If you’re considering getting out the tool box, spanner, and grease-laden towel, you need to carefully weigh up the risks and benefits. A trained mechanic will need to complete certain tasks, while you may be perfectly capable to handle other aspects yourself.

If you’re short on time, it may be worth paying for the convenience of a full vehicle service. However if you’re trying to slash your expenses, there are some basic maintenance tasks that you can complete yourself.

You should call a mechanic if you’re unsure about a vehicle maintenance task you’re about to take on. However there are a number of maintenance tasks that you may be able to complete with your own two hands including:

  • Replacing your car battery
  • Changing the oil
  • Replacing worn windscreen wipers
  • Replacing blown fuses

Remember to keep your car’s body in good condition, by washing and applying a protective wax on a regular basis, too.

Always check your car warranty agreement as some new car purchases come with an extended car warranty provided your services are conducted at the vehicle service centre where you purchased the car. In these circumstances, you may find the service fee is capped, alleviating some of the maintenance woes.

What is a secured car loan?

A secured car loan is a loan that is connected to a form of security, or collateral. Generally, the security for a car loan is the car itself. If you fail to repay the loan, the lender might seize your car, sell it and then use the proceeds to recover their debt.

How much is your car worth?

If you already own a car, you could potentially bring down the cost by selling your car in the process. Before that happens, though, you’ll need to find out how much your car is worth.

One of the first places to find this value is to research the value of your current car, giving you an idea of roughly how much it’s worth in its peak condition.

There are plenty of websites that offer a free online valuation, allowing you to enter your car’s make, model, year, badge and description, with results listing a price guide based on both selling your car privately and through a dealership.

Of course, dealerships will try to profit on your trade-in by buying it for less than they can sell it, making it highly unlikely that you’ll get the same price selling a car to a dealer as you would selling a car privately.

However, private car sales can be costly and can take months to sell, making car trading more convenient with a guaranteed return, even if you may not be able to realise the total value of your car’s worth.

Remember that everything is negotiable. If the dealership is offering you less for your trade than you wanted, try to negotiate elsewhere to gain that money back. Start by negotiating on the price of the trade and then ask them if they can give you a further discount on your new car.

Where can I get a student car loan?

Student car loans are not a necessarily a product in and of themselves, but what you may be looking for is a guarantor car loan.

A guarantor car loan has a third-party act as a form of guarantee for your loan application, telling the bank or lender that if you default on your loan, someone will pay the loan repayments.

Going guarantor on a car loan is no new thing, and before internet-based credit scores, guarantor car loan applicants would apply for loans with a guarantor or property owner who could vouch for the person borrowing the loan.

To get a guarantor car loan, you’ll need someone willing to act as a guarantor for your car loan.

How much is my car worth?

If you own a car, it may be something that can help you bring down the cost of your next vehicle purchase through its sale. However, before you can do that you’ll want to find out how much your car is worth.

Your car’s worth can depend upon various aspects, including:

  • Age
  • Condition
  • Model and make

A great starting place for aspects of this includes websites that offer online valuations, allowing you to enter your car’s make, model, year, badge and description, with the listed results displaying a price guide based on both selling your car privately and through a dealership.

Both have pros and cons, as cars can be very profitable, something that will no doubt impact any chance you have to make the most of your car’s value upon sale. Dealerships will try to profit on your trade-in by buying it for less than they can sell it for, so you shouldn’t expect the same price selling a car to a dealer that you would necessarily get selling a car privately.

How to find a great car loan

Historically, finding a great car loan would require excess research ranging from visiting an excess of websites or making phone calls, but technology has moved on. Using RateCity, Australia’s leading financial comparison service, you can check out great deals from a range of lenders on the one site.

To start, select the amount you want to borrow and the length of the loan, narrowing your search to show just fixed or variable interest rate results.

Once you’ve indicated your search criteria, you’ll see an immediate list of lenders, ranked by interest rate or application fees. You’ll also be able to view the monthly repayment amount for each result, helping you to know what you can afford.

Up to six products can be compared side-by-side, complete with more information about each car loan, giving you more information about your options.

When comparing your car loan options, it’s ideal to keep in mind some points find a great car loan for your needs. Consider the following:

  • Choosing a low interest car loan can reduce costs
  • Selecting an option with low fees and charges is ideal, because these can really add up
  • Be aware of penalties, such as early exit penalties if you pay off the loan sooner than expected
  • Consider the features that best suit your situation

There are many ways to ensure that you get a great car loan. Ultimately, you’ll end up with the best deal by doing your research and selecting the most suitable product for you.