How to Sell a Car With a Loan

ByG. Dautovic
December 22, 2021

If you have taken a car loan only to realize that you don't need the vehicle any longer, you may be seeking information on how to sell a car with a loan. Indeed, if you are struggling with loan payments, reaching out to buyers could give you the financial breathing room you need.

However, you need to understand how your auto loan affects the transaction. 

First of all, can you sell a car with a loan when you haven't paid off the balance owed to a lender? The answer is no. You will not be able to transfer the ownership of the vehicle if it is still under a loan. Consequently, you need to decide how to handle the car loan to sort out your situation effectively.

There are different options for exchanging or selling a car you owe money on. 

What To Know Before You Can Sell a Car With a Loan

Taking an auto loan means that your lender acts as a part-owner of the car. The lender's name could appear on the vehicle title, for instance. Alternatively, some lenders hold the title until the loan is paid off.

In other words, you are not the full owner of the vehicle, and therefore, you can't sell a financed car without sorting things out with the lender first. Indeed, to transfer car ownership to future buyers, you need to pay off your loan and secure the car first.

Therefore, the first thing you want to determine is how much the remaining balance is. This will help you figure out whether selling the car will pay off the loan. 

Your lender can provide you with the relevant information regarding the payoff amount and how to approach the transaction. Lenders can provide you with the different financial steps and tell you how to sell a car with a loan and transfer ownership. 

If you choose to sell your vehicle privately, you must complete the transaction via your lender. Local bank branches tend to let you and the buyer sign the paperwork in one of their offices to complete the transaction. On the other hand, an online lender will operate via a partner (a bank or other financial entity). 

Additionally, you also need to determine how much your car is worth. A pricing guide like Edmunds or Kelley Blue Books can help find the current private party value for private sales or the trade-in value with NADA guides if you prefer a dealership. 

Pay Off the Loan Before Selling the Car

Clearing the loan balance before putting your vehicle up for sale will ensure you obtain full ownership of the vehicle. This makes it easier to transfer the title to the buyer. Most buyers will prefer buying a vehicle that doesn't come with a loan. 

Clear the Balance and Get Your Car Title

It may not be a simple and quick process. However, it can be beneficial if the amount you owe is greater than the vehicle's current value. You have negative equity when there's more balance to repay than you get by selling the car. Unfortunately, selling a car with negative equity means that you have to give your lender all the money from the sale plus some more to meet the payoff amount. 

You can borrow money from a low-interest loan with a short repayment term to clear the car loan balance. Once the car is sold and you have some more money, you can pay that loan off.

Pay Off the Loan Partially for Positive Equity

You do not need to pay off the auto loan fully. Instead, you can choose to reduce the debt and get positive equity. It will ensure you receive enough money from the sale to settle the balance with your lender without requiring additional payments from you or the car buyer. This can be a quicker and more effective process if you wish to sell soon or if funds are limited. 

Refinance Your Existing Car Loan

If your financial situation permits it, you can seek a refinancing loan for your car at a lower interest rate. Rather than getting a new car, you can discuss refinancing options. This option requires a good enough credit score from a credit bureau to obtain a beneficial interest rate. Lower interest rates can give you enough financial breathing room to pay off your loan. 

How To Sell a Financed Car Without Paying It Off

As mentioned above, you do not necessarily need to pay off the balance in full before selling your vehicle. However, even if you sell a financed car without paying it off beforehand, the lender needs to recover the money you owe them at some point during the purchase process. Selling the vehicle does not mean you don’t owe them money anymore.

Selling a Car With Positive Equity Privately

If you are confident that your vehicle is worth more than the remaining balance on your car financing, you can use the car sale to pay off your debt. 

Suppose you still owe $4,000, and your buyer is paying $10,000 for the vehicle. After paying off the lender, you can pocket the remaining $6,000. You will need to work with the lender to sign the title and transfer the ownership to the buyer. 

Potential Sale Obstacles 

Some money lenders are unwilling to release the car title unless you pay your balance in full first. You might have to request from the buyer to pay the lender so they can receive the title. However, this can be a delicate conversation as many buyers are reluctant to trust the process. 

Loan Information on a Classified Car Listing

You do not need to mention your car loan in your classified car listing. However, you must explain the situation once you have a serious buyer. It's essential to clarify the necessary steps with your lender, so you can ensure the sale process goes smoothly. 

Selling a Car With a Loan to a Dealership

Dealers are more experienced when it comes to handling financed vehicle purchases. They are familiar with the necessary loan paperwork. 

Before approaching a dealership, you need to research how much your vehicle is worth to dealers. Unlike private buyers, dealers evaluate vehicles based on the National Automobile Dealers Association's guides. Selling to a dealer is typically less profitable than finding a private buyer.

However, it can be advantageous if you wish to make a trade-in for a new car. 

Trade-Ins With Positive Equity

Essentially, the only way to approach dealers is through the process of trading in a financed car. If you trade in a vehicle with positive equity, the dealer gives you credit, which can be used toward financing your next car purchase with them.

Trade-Ins With Negative Equity

However, if you owe more than the car is worth, you might end up taking a bigger loan on the next vehicle. This can be a dangerous decision, especially if you are already struggling to pay off the current loan. 

Transfer the Loan to Your Buyer

You do not need to sell the car to pay off the loan. Instead, you can reach out to your lender to discuss the possibility of transferring the auto loan to someone else. 

This can be a valuable option if you face serious issues regarding loan repayment. For instance, if you can't afford the loan anymore, transferring the loan to another borrower could solve your problems. 

You need to obtain the lender's permission to transfer the loan. Not all lenders will allow you to make the transfer, depending on your contract and on the borrower's credit score. However, if the borrower meets your lender's requirements and the transfer is permissible, this could mean two things for you:

  • The new borrower will become the owner of the vehicle when they pay off the loan 
  • You do not need to make payments towards the loan anymore

However, as this option does not involve selling your car, you will not receive any money during the transfer of ownership. You’ll need to arrange with the new car owner to get at least some money for the payments you’ve already made on the vehicle.

Bottom Line

If you are wondering how to sell a car with a loan, there are numerous options involving dealerships and private buyers. However, you need to be aware of your loan agreement and how much balance you still owe to your lender. Ideally, you want to sell with positive equity to make a profit.

Negative equity will force you to pay more than you receive through selling or trade-in. Regardless of your decision, you will need to settle the loan balance to free the car title. Transferring the loan is the only option to transfer ownership without worrying about the payoff amount, but don’t count on making a profit from your car that way.

FAQ

Can you sell a car without a title?

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The title or the bill of sale for old vehicles is proof of ownership. You cannot sell a vehicle you don't own or without evidence that you are the owner. For any missing title, you should get in touch with your state's department of motor vehicles for further assistance. 

Can I transfer a car loan to someone else?

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If your lender agrees to the transfer, you can free yourself from loan repayment through this option. However, when you transfer the loan, you also lose ownership of the vehicle. 

Does selling a financed car hurt your credit?

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The short answer is: it depends. Ultimately, it is a good idea to pay off any debt early if you have a high-interest loan or wish to bring your DTI (debt-to-income) ratio down to apply to another loan in the future. However, repaying your loan too early can affect your credit score slightly, and selling a car that you cannot pay off definitely won’t do any wonders for it either.

About author

I have always thought of myself as a writer, but I began my career as a data operator with a large fintech firm. This position proved invaluable for learning how banks and other financial institutions operate. Daily correspondence with banking experts gave me insight into the systems and policies that power the economy. When I got the chance to translate my experience into words, I gladly joined the smart, enthusiastic Fortunly team.

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