Selling a car under finance – what you need to know

Last updated on July 5th, 2023
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What makes selling a car under finance a difficult task?

What may complicate selling your financed car is your loan’s requirements. A regular car loan holds the car as a safety measure in case you can’t pay off your payments. If you don’t meet your car’s payments, the lender can reclaim your car and sell it in order to regain the money.

The buyer ought to repay the loan. However, the balance functions against the car, as it is the ground of the secured loan. This is what encumbrance is.

Is your car encumbered?

If you don’t owe money against your car, that means it’s not encumbered. For instance, if you have a mortgage on your house, your house is the security. Thus, if you don’t have a car loan, that means your vehicle is not encumbered. So, the loan is distributed to you as a seller, not to the car itself.

This is why personal loans encompass much higher interest rates. Without the existence of a safety item, the loan is considered to be higher risk. Interest rates might vary in accordance with the risk accompanying the personal loan.

Is it possible to sell a financed car?

If you have decided to sell your financed car, the first thing you need to do is to go to the bank and see exactly the manner in which you are going to pay off the car loan. In such a case, one of the things you will have to do is to pay the car loan early. However, be aware that this move comes with some additional fees you’ll have to pay. The amount of money you are going to pay depends on the lender, but the costs usually include a cost-recovery fee, a break fee and an administration fee.

If you can’t afford to pay off the loan, then you’ll have to work with your financial institution and have them complete the transaction. In this case, the buyer will pay for the vehicle directly to the bank.

Nonetheless, there are cases in which the loan is higher than the car’s actual worth. In such situations, you will have to pay the difference between the debt and sale value. This way, the bank is going to take off the encumbrance from the vehicle so the new buyer can have a clear title.

Honesty is the best approach

Even if you’re selling an encumbered car, that shouldn’t be a problem, as long as you’re honest about your situation. The odds are that if you’re not entirely honest with a potential buyer, he/she will eventually find out about your car’s situation, and you won’t manage to make a successful sale.

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