How to Sell a Car When You Still Have a Loan
Selling a car can be a headache, and selling one you still owe money on can be even more taxing. Though it sounds hard, it is very common. While selling a car when you still have a loan on it can complicate the selling process a bit, since the car’s title is held by the lender and not you, it doesn’t mean the transaction can’t be done.
There are certain things to consider when trying to sell your car with a loan. You want to ensure you go about this legally and efficiently. Follow the steps below to learn how to sell a car with a loan.
- Four steps to selling a car when you still owe money on it
- How to sell your car when you have “negative equity” or are “upside down” on your car loan
- How to sell your car when you have “positive equity”
- What do you do when the bank wants the payoff before you sell your vehicle?
- Selling a car with a loan can be easy if you do it right
Four steps to selling a car when you still owe money on it
Selling a car when you still owe money on it can seem stressful, but there are ways to go about it that can help alleviate the stress. Whether you want to sell your car to a dealer, trade it in or sell it to a private party, there are specific steps you must follow to do so.
- Determine the payoff amount. This is the amount that you owe on the loan. You’ll need this so you can pay off the remaining loan on the car before transferring the title. The best way to get this number is to contact your lender directly to ask how much you owe. The payoff amount will include both the interest and prepayment penalties the lender may charge.
- Get the details needed to sell. Speak with your lender to find out all the information and documentation that you’ll need to gather in order to clear your loan and sell the car. You should also check with your state’s Department of Motor Vehicles (DMV) to find out what paperwork you’ll need to provide in order to legally sell the vehicle. Some things might include:
- Paperwork. Is there certain paperwork needed to have the new owner sign in order to transfer the car? Some states require a bill of sale (detailing the price of the car that is being transferred) and a release of liability (releasing you from the car’s liability should something happen after the title has been transferred) to be filed with the local DMV. Paperwork can vary depending on the state you live in, so it’s best to check with your local DMV about the requirements in your area.
- Does the buyer need to be present? Will the buyer need to be present in person during the sale? In some cases it’s easier to execute paperwork when the buyer is present, but some buyers come from out of state.
While it’s ideal to meet at a physical bank location to take care of the paperwork and pay for the sale, many auto lenders can be either out-of-state or based entirely online, which means they do not have brick-and-mortar locations. In cases like these, you can use an escrow service. The buyer can pay for the car through the escrow service where it will remain safe until the title can be released in their name and the seller will then receive the funds. Kelley Blue Book (KBB) encourages anyone who wants to work with an escrow service to determine its authenticity by checking with the local state regulator first.
Dealing with an out-of-state lender may also mean a trip to the DMV. Here, the new buyer can bring in the bill of sale to get a temporary operating permit so they can drive it. After the car loan is paid off, the title will then be given to the buyer.
- Remember rules can vary. Lenders have different requirements when it comes to selling a car with a loan on it. It’s essential to discuss what is needed to ensure you have everything to finalize the sale as quickly as possible. Asking your lender for a pay-off letter is also a good idea. This will provide how much is left that you owe on the loan (so you can try to find a buyer for that price) and available payment methods. You’ll also want to see if there are any associated fees so there aren’t any questions along the way.
By going over the requirements with your lender, you’ll be able to find out how to pay the loan so the buyer can have the title and you can be free from the car while avoiding any slip ups that can cause delays. These include not knowing your correct payoff amount (you could end up owing more than expected), not getting the title to the buyer in a timely manner (this process may need to be expedited) and illegally transferring your car when you still owe money on it and the lender hasn’t been paid in full.
- Find out how much your car is worth. Determine your car’s value by using a vehicle valuation site such as KBB. On this site, you’ll need to enter key information about your car, like the make, model and overall condition. One thing to keep in mind: who you sell the car to can impact what the car might be worth. We’ll go over more details in sections to follow.
- Are you underwater on the loan? Once you have an idea of what your car is worth, and how much you owe on it, you can find out if you have either positive or negative equity on it. You can find out if you are in positive or negative territory by doing some simple math: subtract the amount you owe on your loan from the estimated value of the vehicle. If you owe more than the car’s worth, you have “negative equity” which also may be referred to as being “upside down” on your loan. However, if you owe less than what your car is worth, this means you have “positive equity,” and could mean that you make a little bit of money on the sale of your car. Knowing which type of equity you have will help determine the next steps (included below) to follow for the sale.
How to sell your car when you have “negative equity” or are “upside down” on your car loan
If you’re trying to sell your car with a loan and learn you have negative equity, it simply means you owe more on your car than it is worth on the market. As we mentioned earlier, this can also be referred to as being “upside down” or “underwater” on your car loan.
But while this sounds a little scary, it isn’t uncommon. Edmunds, an online company that specializes in car resources and sales, states on its website that nearly a third of drivers with auto loans are upside down on them. So if you’re in this predicament, you can rest assured that many others might be as well. While selling your car with negative equity can pose some challenges, following these steps can help.
Find out just how underwater you are. Learning what your negative equity is can be calculated simply by taking the car’s value and subtracting it from what you owe on the loan. Depending on the amount of negative equity will help determine your next steps. If the amount isn’t too high — say around $1,000 or so — you may be able to pay it off out of pocket, especially if you have some savings. If the amount is too high for you to tackle — for example, if you’re well into the several thousands underwater — there are other options, including different types of loans to help. We’ll cover these later on.
Reach out to your lender. Once you know how much negative equity you have, it’s best to go over all your options with your lender. Ask about possibly paying more on your monthly payments to get the loan paid off faster. Your lender may have other options to offer as well, such as refinancing your loan. It’s important to keep an open dialogue with the lender to help determine the best solution possible. You’ll want to discuss your selling options: selling it privately, to a dealer or trading it in. It’s also important to know about any specific rules you need to follow when selling, such as ensuring the lender gets back the negative equity that you owed during the transaction and making sure that a car isn’t sold without providing the title to the new buyer — this is illegal in many states.
Prep your car for the sale. You want to make sure your car is in tip-top shape in order to sell it. Just a simple wash, vacuum and wax can help it seem more attractive in the eyes of the buyers. If you have the time and money, it can benefit the value to fix any problems that might keep it from selling, such as mechanical issues or noticeable dents and scratches. It’s also smart to ensure any outstanding recalls are taken care of beforehand so the buyer doesn’t need to worry about them once they purchase the vehicle. If you don’t know whether your car has any current recalls, you can find out online at SafeCar.gov and entering your Vehicle Identification Number (VIN).
Sell your car. When selling your car, you want to get as much as you can for it. A private sale is usually more lucrative than getting rid of your car via trade-in. You can reach more potential buyers with the help of online classifieds and word of mouth. Plus, if you can sell your car for more, you may be able to cancel out your negative equity.
There are a few drawbacks to selling your car to a private party, however. You’ll be the one who needs to obtain all required documents, including the car’s title. It is also time consuming, as it’s up to you to advertise your car and meet with potential buyers to discuss the vehicle and asking price. The selling process can also be stressful with a private sale, since there is always the potential of fraud. It almost never makes sense to take a personal check when selling your car in a private sale — only cash or a cashier’s check should be accepted during a private sale so there is less chance for fraud.
Trade in your car. When you trade-in your vehicle to a dealership, you likely won’t get more than the wholesale value, but the dealer will be the one who manages and obtains all the documents for the sale. You can also sell your car directly to a dealer and get a check for what the car is worth. However, you’ll likely get more for your car when you find a private buyer rather than a dealer.
Something to also keep in mind: no matter what option you choose, you’ll still need to pay off the negative equity. However, some dealers, like CarMax, may allow you to purchase another car with them while still having negative equity by adding what you owe to your new car loan. If you’re simply looking to sell the car with negative equity and not purchase another one in the process, you’ll likely have to pay the difference just like you would in any other type of sale.
How to sell your car when you have “positive equity”
While negative equity means that you owe more on the loan than what the car is worth, positive equity is when you owe less than the value of the car. That means you may walk away from the sale with some money in your pocket! Selling a car with positive equity is a much easier process:
Discuss the sale with your lender. Selling a car can be overwhelming, especially when you still have a loan on it, so it’s best to set up a time to chat with your lender to get the ball rolling. The selling process can vary with each lender, so find out what is needed, like payoff amount and how to set up the sale so the buyer can get the car’s title (which the lender has since you still owe money on the loan). The buyer may need to pay the lender directly in order to get the title to the car and to take over what you own on the loan if you are not able to pay your debt off yourself. You’ll also want to know how long it will take to get a title to the buyer. This process can take longer when you still owe money on it, but some lenders allow you to pay a fee to speed up the process. This will be especially relevant if the buyer is uneasy about purchasing the car without having the title right away.
Know your car’s value and payoff amount. Determine how much your car is currently worth and how much you owe on it — this will help you decide if selling right now is the best decision, or if you’d be better off keeping the car and paying off some more of the loan.
Sell your car. You have the option to sell your car with with a private sale or as a dealer trade-in. However, when you have positive equity, the process works a little differently. During a private sale, you get to pocket the extra money instead of paying more to the lender.
This can be done three different ways: Either the buyer can pay the full amount to the lender and they will return any overage to you, or the buyer can write two checks — one for the remainder of the loan and one for the remainder due to you. You could also ask the buyer to write you a check for the car, then pay the remaining loan out of that, once the check clears. You’ll need to check with your individual lender to figure out which way is the best way to proceed.
A trade-in on the other hand, will get you a credit from the dealer, but not cash. This credit will be the difference that is owed to you, which can be put toward buying another vehicle. However, you also have the option to sell your car to a dealer, like the aforementioned CarMax. When you sell your car this way, you will get a check for the car.
What do you do when the bank wants the payoff before you sell your vehicle?
A bank may want the car loan payoff amount before you’re able to sell it. This is very common, but it does mean that you’ll need to do more legwork. Luckily, there are several options you can choose from, but you’ll need to research them to determine which might be the best for you.
Refinance your car. Those with good credit (usually around 700) can potentially refinance their loan at a lower interest rate: however, know that it’s important to shop around. While lower monthly auto payments can seem ideal, you will most likely have to pay them over a much longer period. And with a longer term, you’ll likely take on more debt and the potential for negative equity. A car’s value doesn’t stay high for very long after the purchase: in the first year alone, the value can drop 20% and the more wear and tear on a car, the less it is worth.
Get a personal loan. A personal loan can be used for many things, including paying off your car loan. However, since they are unsecured loans which do not require collateral, they tend to have much higher interest rates. Because unsecured loans have higher interest rates, this can also mean you’ll have higher monthly payments with these types of loans. Your car could also be repossessed if you can’t make your payments.
Use a home equity line of credit (HELOC). The monthly payments on a home equity line of credit (HELOC) may be lower than the payments on a car loan, so it may make sense in some situations to consider taking out one of these loans to pay off the debt for your car.
HELOCs tend to have lower monthly payments because the term can be longer. However, a longer term can bring more accumulating interest, causing more debt in the long run. In addition, your house is up for collateral with a HELOC, which means you could lose it if your HELOC payments aren’t made.
Use your savings. If you have extra savings you can use it to pay off your car loan and not take on more debt. However, not everyone has extra money to use and pulling from a savings account is not always an option.
Selling a car with a loan can be easy if you do it right
Selling a car you still owe money on can be intimidating but if you do it right, it can be an easy and smooth transaction. It’s important to know your car’s value, the payoff amount, and whether you have negative or positive equity. Maintaining an open conversation with the lender (and the DMV) will ensure accuracy and allow you to figure out all your options. Each lender has its own rules and regulations when it comes to selling a car with a loan, and it’s important you follow them so there aren’t any issues that arise later on. If the bank needs the payoff amount before you can sell, there are options, too. Just keep in mind some of these options can cause more debt. Always weigh the pros and cons before making any final decision when selling your car with a loan.