It’s not difficult to sell a car with a loan on it — but it adds extra steps and might take a little longer.
When you have a loan, the lender is, in a sense, part owner of the vehicle. The lender’s name may be listed on the car title or the lender may actually hold the title. This is to ensure you can’t sell the vehicle and transfer the title to the new owner without the lender getting its money — or the balance of the loan.
Whether you want to sell your car to a private party or trade it in to a dealer, you’ll need to know how much you still owe on your loan, whether it’s more or less than what you’ll be able to get by selling your car, and how your lender requires you to handle the transaction.
Information you’ll need
Start by getting some basic information about your loan and your car:
1. Ask your lender for the “payoff amount” and how to handle the transaction. The payoff amount is how much it will cost to own your car outright. The loan must be paid off completely for the lender to release ownership and sign off on the title. If you’re planning to sell your car privately, also ask the lender about the necessary steps.
If the loan is from a local bank, or one with local branches, they’ll probably tell you to find a buyer and bring them to a bank office to sign the paperwork.
If you have a loan with an online lender, they’ll likely direct you to a bank partner or another financial entity to complete the transaction.
2. Determine what your car is worth. Using a pricing guide, such as Kelley Blue Book or Edmunds, find the current private party value of your vehicle, what you’re likely to get if you sell the car yourself, or the trade-in value of your vehicle, which is roughly what a dealer will give you for the car. Generally, you’ll get more for your car in a private party sale than when you trade it in. Consider getting a purchase offer from CarMax or another dealer offer; it'll serve as a good benchmark for you to beat and as a backup in case your plans fall through.
3. Subtract the payoff amount from the value of the vehicle. If the result is positive, you have equity in your car; if it's negative, you're upside down on the car loan. Selling a car with negative equity means you need to give the lender all the money from the car sale and pay for the negative equity.
With this information in hand, let’s look at each scenario.
Private sale with positive equity
The buyer will pay the total amount to the lender and the lender will then pay the difference to you. Or, the buyer will pay your remaining loan balance to the lender and make a separate payment to you. For example, if you still owe $5,000 and your buyer is going to pay $15,000 for your car, you’ll pocket $10,000 for the sale.
Then you and the lender sign the title and give it to the buyer. The buyer takes the signed title (and any other required paperwork) to the state’s department of motor vehicles and gets a new registration and title.
A title in hand can make a private-party sale much easier. If you have excellent credit, you may be able to take an unsecured personal loan to cover the entire amount owed on the car. With an unsecured loan, the lender will not be placed on the title. The title will come to you, and the car will be yours alone. But rates on unsecured personal loans, even if your credit is great, will be higher than most auto loans; pay it off as soon as you have the buyer's check banked.
Private sale with negative equity
When you owe more than your car is worth, you have to give the lender the difference between the sale price and what you owe.
The buyer will pay the sale amount to the lender. You pay the difference. For example, if you still owe $10,000 and your buyer will pay $9,000 for your car, you would pay the lender the $1,000 difference. Then you and a representative of the lender sign the title and give it to the buyer so they can get a new title and registration.
If you have good credit, you can take a personal loan to cover the gap. Personal loans are more expensive than most car loans; you'll need to pay it off as quickly as possible.
A title in hand can make a private sale much easier. If you have excellent credit, you may be able to take an unsecured personal loan to cover the entire amount owed on the car. With an unsecured loan, the lender will not be placed on the title. The title will come to you, and the car will be yours alone. You can repay the bulk of the loan when the car sells.
Trading in a car you owe money on
In this case, the dealer can handle all the paperwork. When you trade in a car that’s worth more than you owe, the dealer gives you a credit for the difference to use toward the purchase of your next car.
But if you’re upside down on the loan, the dealer will likely offer to add the negative equity amount into the loan on your new car. Tread carefully with this option because it means you’re actually taking out a bigger loan for the next car. You may want to consider refinancing your present car loan at a lower interest rate rather than getting a new car.
If you’ll be taking out a new car loan when you trade in your car, making these smart decisions will save you a lot of money:
Check your credit score and know what interest rate you qualify for
Get preapproved for a new loan before you go to the dealership. This will keep the dealer from inflating the interest rate on the new loan.
Know the trade-in value of your present car and the true market value of the car you’re buying. If the dealer doesn’t give you close to these prices, try another dealer or sell the car to a private party.
In some cases, an online lender will require the full balance of the loan before it releases the title. If you have the cash ready to pay off the loan and then sell your car, you can do that. Otherwise ask the buyer to provide the money to the lender and have the title mailed directly to them. If you have a close relationship with the buyer (like a neighbor or friend) this will work. But it will be harder to get other buyers to trust this process and spend the extra time it requires.
Working with buyers
When you sell a car you have a loan on, some buyers may be skeptical and reluctant to go through the extra steps. However, if you handle it correctly, many buyers won't object. Involving a bank or recognized financial institution will give the buyer confidence that it’s being done correctly.
You don’t need to put this loan information in your classified car listing. But once you feel you have a serious buyer, explain the situation before arranging a test drive. Tell them that you’ve talked with your lender and know the exact steps required.
In most cases, these steps won’t add time to the sale. In fact, closing a car deal at a bank is a good idea even when a loan isn’t involved. It provides a safe meeting place and, usually, bank employees can answer questions about vehicle transactions.