How to Sell a Car With Finance Owing

Plenty of people want to sell or upgrade a car before the loan on it is finished. The question is always the same: can you sell a car with finance owing? Yes, and it’s common. The condition is that the loan has to be paid out as part of the sale so the lender’s claim over the car is removed. Here’s how that works, what you need from your lender, what happens if the car is worth less than you owe, and how to do it properly whether you’re selling privately or trading in.

Why the loan has to be paid out

When a car is financed with a secured loan, the lender registers a security interest over it on the Personal Property Securities Register (PPSR). That interest stays on the car, not on you, until the loan is paid out. If you sold the car without clearing the loan, the buyer would inherit the lender’s claim and the lender could repossess the car from them. That’s why any informed buyer will run a PPSR check before paying (we’ve explained that side in how to check if a car has finance owing), and why the finance has to be settled before or at the moment of sale. Our guide to secured car loans covers why lenders take security in the first place.

Step one: get a payout figure

Contact your lender and ask for a payout figure, in writing. It’s the exact amount required to clear the loan on a specific date, and it typically includes the remaining principal, interest accrued to that date, and any early payout fee or adjustment your contract provides for. Two things to know:

• It changes daily, because interest accrues daily, so a payout letter is valid only for a short period. If the sale is delayed past that, you’ll need an updated figure.
• It’s the number the lender will actually accept. If the amount paid falls short of it, even slightly, the lender won’t release its interest. Don’t estimate it from your last statement.

It’s also worth checking your loan contract. Some contracts require the lender’s consent before the car is sold, and knowing whether an early payout adjustment applies helps you set a realistic asking price. We’ve covered that separately in paying off a car loan early.

Step two: work out your equity

Compare the payout figure with what the car is realistically worth.

Positive equity: the car is worth more than the payout. The loan is cleared from the sale price and the balance is yours. This is the straightforward case.

Negative equity: the car is worth less than you owe, which is common early in a loan, or when a car has depreciated faster than the balance has reduced. The sale price won’t cover the payout, and the lender still needs the full figure before it releases the security interest, so you’ll need to cover the shortfall from your own funds at settlement. If that isn’t possible, the practical options are to wait until the balance comes down, or to talk to your lender or a broker about restructuring; our refinancing page covers what’s possible.

Selling privately

A private sale usually gets the best price, but the payout needs to be handled carefully so both sides are protected:

• Tell the buyer the car is under finance. Be upfront. An encumbered car isn’t a problem if it’s disclosed and settled properly; concealing it is. Some states specifically require disclosure, and in any state a buyer who runs a PPSR check will see the registration anyway.
• Settle the payout from the purchase money. The safest method is for the payout amount to go directly to your lender at settlement, with the balance coming to you, rather than the buyer paying you the full price and trusting you to clear the loan. Buyers are rightly wary of the second arrangement.
• If the buyer is financing the purchase, their lender or broker will handle the payout of your loan as part of their settlement: they pay your lender the payout figure and you the balance, and the release follows. This is often the cleanest way for both parties.
• Get the release. Once the payout is received, the lender releases its security interest and the PPSR registration is removed. Confirm it’s done, then complete the registration transfer with your state transport authority.

Trading in to a dealer

If you’re upgrading, trading in is simpler administratively. The dealer obtains the payout figure, pays out your lender directly, and offsets the payout against the trade-in value. If you’re in positive equity, the difference reduces the price of the new car; if you’re in negative equity, the shortfall is either paid by you or, in some cases, added to the new finance, which is worth thinking about carefully because it means borrowing more than the new car is worth from day one. A broker arranging the new finance can walk you through that decision before you commit.

Selling to a car-buying service

Online car-buying services and wholesale buyers also handle financed cars routinely, and they usually manage the payout and release as part of their process. The trade-off is generally a lower price than a private sale in exchange for speed and simplicity.

The order of events, in short

1. Get a written payout figure from your lender.
2. Establish the car’s value and your equity position.
3. Disclose the finance to the buyer.
4. At settlement, the payout goes to the lender, the balance to you.
5. The lender releases its interest and the PPSR registration is removed.
6. Transfer the registration to the new owner.

Get those in order and selling a financed car is routine. Skip the payout or the release and it becomes a problem for the buyer, and then for you.

If you’re the buyer on the other side

Everything above is what the seller should be doing. If you’re buying a car that has finance owing, the same steps protect you, and financing the purchase through a broker or lender puts the payout and release in professional hands at settlement. Our car loans page sets out what we arrange.

This article is general information only and is not legal or financial advice. Check your loan contract and your state’s requirements for disclosure and transfer.

Damo Treadgold is the director of Treadgold Finance, an FBAA-accredited finance broker on the Sunshine Coast, arranging car, boat and equipment finance Australia-wide.

Frequently Asked Questions