What Can I do If I Want to Sell a Car with Outstanding Finance?
You might want to sell a car which you acquired on finance for many reasons. When you have outstanding finance on your contract, you might be a bit confused as to what your options are, and when you can sell your car. Let’s clear things up.
When you buy a car on finance, the name on the contract is yours; however you won’t own the vehicle until you’ve paid the costs in full. If you’ve paid less than 50% of the costs you cannot sell your car or end your car finance contract early. What your options are beyond that, depend on the type of finance deal you’re on.
The main types of car finance products which allow you to own the car at the end of the contract are hire purchase (HP), personal contract purchase (PCP) and conditional sale.
So, what are your options for selling or trading in your car in these situations? And how will that impact you if you’re looking to establish another credit deal on a new car?
How can I sell my car on finance?
Around 90% of cars in the UK are bought on finance and many are sold before the finance contract reaches its end.
At the end of a car finance contract you can choose to pay an “option-to-purchase” fee (Hire Purchase) or a balloon payment (PCP) to own the car outright, which you are then free to sell if you wish. However, for various reasons, many people want to sell their car before their contract ends.
Whatever car finance agreement you are currently on, before selling your car you will have to contact your finance provider to get a settlement figure that you will need to pay to clear your loan.
What is a settlement figure?
When you’re ready to sell your finance purchased car, you’ll need to inform the leasing company when you have outstanding finance on your contract because you don’t own the car yet.
A settlement figure is the amount needed to repay the loan in full, or to settle the agreement between you and the finance company.
To be able to sell your vehicle you must pay the settlement figure in full, along with any early repayment charges and admin fees. Once you have paid this you can arrange to sell the car. Because the settlement fee has been paid, the new buyer of the car will be the new owner.
It’s illegal to sell a car bought on finance without first requesting a settlement figure and fully clearing the debt. If you do so you will have committed fraud and could be prosecuted.
The buyer will be affected too. Their new vehicle could be repossessed by the leasing company, however they may allow the buyer to keep the vehicle if it was purchased in good faith; this is known in the auto trade as having a good title.
If you sell your car without clearing the finance the most likely outcome is the finance provider will take you to court if you don’t settle the debt and fees, and/or for breaking the terms of your contract.
Buyers can avoid this by doing a history check on a vehicle before moving ahead with a purchase. You can easily arrange a data check through the AA, RAC or an HPI check. When hire purchases are taken out, the vehicle is automatically registered on the HPI or Experian databases.
Buying a car through a dealership rather than privately will eliminate the risk of you buying a car that has outstanding finance, as the dealer would have ran a data check on the car before acquiring it.
Early exit fees
When selling your car with outstanding finance you won’t have to pay the accrued interest, but you may have to pay what is known as an early exit fee. This will usually be 1% of the outstanding amount or 0.5% when there is less than a year left on the contract.
Will a car dealership settle my finance?
When selling your car to a dealership if you have outstanding finance, the dealer will require an up to date settlement figure for your car finance. Some dealers may pay the settlement figure directly to your lender if it is less than the value of the car, after which they will either pay you the surplus or you can use it for a deposit on a new vehicle.
Ending a car finance contract when you have paid 50% or more of the contract’s cost is known as voluntary termination, and is possible when you meet all the terms of the finance deal, including sticking to agreed mileage limits and maintaining the car’s condition.
Voluntary termination is possible on Hire Purchase and Personal Contract Purchase agreements.
If you haven't paid for 50% of the car’s costs through your monthly repayments, you can make up the difference by paying a lump sum. Once you have done this, you can then return the car. Remember that if you are on a PCP contract, it will take you longer to repay 50% of the total cost through your monthly repayments as you are not paying towards the full value of the car.
If you have paid more than 50% of the contract cost and then return the car, note that you won’t get any of that money back, so it can save you money if you time your return at the halfway point of the finance deal.
It's worth remembering that voluntary termination isn't particularly liked by lenders, and it may show up on your credit file (though it shouldn't really affect your score). This clause is designed to protect consumers who can't afford repayments, and not really intended for people to regularly end contracts early to switch cars.
Each leasing company will have its own rules here, so make sure you know them before you sell. This will help you maximise the proceeds of the sale of the car.
When not to sell
If you are looking to sell because you are struggling to keep up with payments, then you should keep in mind the value of your vehicle. Compare this with the value of the remainder of the loan. If the car is worth less than the value of the loan still to be repaid then you are in negative equity.
When you are in negative equity, it is often a better financial decision to continue with your finance plan. You don’t have to pay off the full amount, but wait until you are in positive equity at least – when the value of the car is higher than the amount remaining to be paid – before considering selling.
In terms of a personal contract purchase, if the vehicle has depreciated more than expected and is worth less than the guaranteed minimum future value (GMFV) figure, your balloon payment can be higher than the value of the car. In this case it’s not worth making the final payment then selling the car because you are in negative equity. In this case you can return the car and walk away at the end of the contract.
If you are in positive equity, that is when the car is worth more than the balloon payment, you can either pay the balloon payment to own the car (and then sell on if you wish), or use the excess as a deposit towards a new finance deal.
What you need to know when buying a new car on finance
You can use the value of your car when trading it in to put a deposit down on a new car finance deal. To get the best deal for your money you’ll need to be aware of the value of your car, and then how much you can realistically get for it.
Also make sure you have the details of the settlement value of your finance plan and the value of the car you wish to purchase.
This will help you compare the different finance deals available for the car you wish to purchase.
If your reason for agreeing to a new car finance deal is that you couldn’t keep up with the payments of the previous deal, this information is especially important, and ensures you won’t get into an arrangement that you cannot manage again.
Compare car finance
You can compare car finance deals whether you have never bought a car on credit, or are considering moving to a new finance deal.
We offer a free and unbiased comparison service, transparently giving you the facts to help you choose a deal which will suit your financial circumstances. Compare deals across APR, loan term and available amounts to determine how much you will have to pay back.
John Ellmore is a director of NerdWallet UK and is a company spokesperson for consumer finance issues. John is committed to providing clear, accurate and transparent financial information. Read more