Do you have a financed car that you need to sell even when it's not fully paid yet?
Maybe your situation suddenly changed, requiring you to get a bigger or smaller car. It could be that you’re out of job, and selling the car is one way to cut your monthly expenses. Or you’re pining for the latest model, making your existing car redundant.
Whatever your reason, you need to know whether selling a car under finance is possible. Is it even legal? First, let's understand some terms.
What is a car under finance? What is an encumbered car?
A financed car or car under finance refers to a vehicle purchased through a loan acquired from either a bank or a dealership’s credit facility.
You would have an encumbered car if you took a loan to purchase it, with the car as the security. As long as the loan is not fully paid yet, the lending institution—whether it’s a bank or dealership—has a legal claim on the encumbered car. In other words, you do not own the vehicle yet and the lender holds the owner’s title to it. The next obvious question would be whether it's legal to sell a car that you don't own.
Is it legal to sell a car under finance?
Is it legal to sell an encumbered car or a car under finance? The short answer is ‘Yes’. The not-so-short answer is that it’s not going to be a walk in the park. There’s a process involved, and it can be complicated.
If you’re selling privately, the law does not compel sellers to disclose financial encumbrances—caveat emptor, right?
What it implies is that it is the responsibility of the buyer to exercise due diligence. The task includes verifying the car's roadworthiness and status, including registration, financial encumbrance, and other security interests. The buyer should conduct an online enquiry with the Personal Property Securities Register (PPSR) and inspect the vehicle for mechanical and roadworthiness.
Notwithstanding caveat emptor, however, the right thing for you to do when privately selling a financed car would be to pay your outstanding loan first. Another way would be to inform the buyer about the loan you owe and promise to pay it with the proceeds of the sale. By being upfront, you might even earn the buyer's trust.
Besides, the Australian Consumer Law states that a buyer should ask for a clear title when buying a car privately. There’s no way for you to provide a clear title without paying off your loan balance first.
So how do I go about selling a car that I have not yet fully paid off?
Before selling a car under finance, you need to do some number crunching first. Here are the steps.
1. Get a free valuation of your car.
Search or Google ‘free online car valuation in Australia’ to get an idea of your car’s value. Use several websites so that you can compare their estimates and figure out the best price to sell your vehicle for. It's important to provide as much details about your car as possible to get a realistic valuation.
2. Enquire how much you need to pay the lender to clear out your loan.
Call your car’s financing institution and ask about the full amount needed to pay off your loan. This should include all the fees required to terminate a loan earlier than the agreed term and other administrative costs that the lender may charge.
3. Find out the difference between Step 1 and Step 2.
If the number you got from Step 1 is greater than what the lender gave you in Step 2, you’re good to go. Meaning, you’ll make a profit from the sale. If it’s the other way around, step on the brakes for a moment. You may have to rethink about selling your car or find a way to pay that negative balance. The result in Step 3 is a vital piece of information that you need to be aware of before proceeding or accepting an offer from a buyer.
4. Inform the prospective buyer about your outstanding loan.
If you have the cash to pay off your loan, then do so before selling it to a buyer. The lender then turns over to you the title, which you may then transfer to the buyer—problem solved.
The likelier case, however, is that you’re banking on the potential sale to pay off your loan. This is where earning the buyer's trust plays a role because it means paying you first before getting hold of the car's clear title.
5. Get the lender involved.
If the buyer is amenable to this arrangement, you may need to involve the lender in the talks. Remember, you promised to pay off the loan with the sale proceeds. If the lender has a standing procedure for it, which they probably have, you can even agree to undertake the sale at the lender's office. The cash will transfer from the buyer to you (to pay for the car), and then from you to the lender (to pay off the loan). The lender may then issue the title to you, which you may then transfer to the new owner.
Note: If after the sale you get negative equity (from Step 3), you will need to fork out the difference to come up with the full amount you owe from the lender.
Before going for the sale, take time to read this article about some common mistakes to avoid when selling a car.
Final thoughts
Selling a car to private individuals is a once-off transaction. There's a limit to the number of vehicles you can sell privately in a year, and this limit varies per state. It involves disposing of a used personal car for cash and not something you should do as a business.
It will be quite challenging to sell encumbered cars privately, as you will soon find out. Most buyers will not be comfortable parting with their cash or check to purchase a car under finance. It may be easier for you to sell to friends, family, and people you know.
It's not merely an issue of them trusting you. It also works vice versa, which reminds us to remind you: ALWAYS transact in cash or cashier’s check. You don’t want a buyer driving off with your car, leaving you with a questionable personal check.
Also, don't forget to visit the Department of Transport in your state to transfer the car's ownership. It might sound like an afterthought, but transferring ownership is crucial because it also transfers all legal liabilities to the new owner. Letting it slip your mind is like leaving loose ends. There are online facilities for this, so check out with your DoT’s website.
If you’re interested in buying and selling cars for profit, or car flipping as some people call it, you should follow another procedure. The government regulates this trade, and you will need to have a license as a secondhand car dealer to engage in it. You may also find this article on other car buying options useful. It will give you an idea about different ways to find your potential buyer.
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By Jeannette Salanga (JMSL)