How to Sell a Car When You Still Owe Money on the Loan

Selling your car can be a smart move for various reasons, whether you’re looking to upgrade, downsize, or simply no longer need it. However, the process becomes a bit more intricate when you’re still paying off a car loan. It’s not an insurmountable hurdle, but it does require extra attention to detail and a slightly longer timeline. When you have an outstanding loan, the lender essentially has a vested interest in your vehicle. They might be listed on the car’s title, or they could even hold the title entirely until the loan is fully repaid. This arrangement is in place to protect the lender, ensuring that the car cannot be sold without them receiving the remaining loan balance. This prevents complications in ownership transfer and secures their financial stake in the vehicle.

Whether you’re aiming for a private sale or considering trading in your car at a dealership, understanding your loan status is the first crucial step. You need to determine the exact payoff amount, which is the total sum required to settle your debt with the lender. Furthermore, knowing your car’s current market value is essential to assess your financial position in the sale. Are you likely to get more or less than what you owe? And importantly, what specific procedures does your lender stipulate for handling the transaction when selling a financed car?

Essential Information Before You Sell

Before diving into the selling process, gather key information about your car loan and the vehicle itself. This preparation will streamline the sale and prevent unexpected hiccups.

1. Contact Your Lender for the Payoff Amount and Transaction Procedures. Your first step should be to get in touch with your auto loan lender. Request the precise “payoff amount.” This figure represents the exact sum needed to fully pay off your car loan at that moment. It’s crucial because it includes any outstanding principal, interest, and potential fees. Also, inquire about their specific procedures for selling a car with an existing loan.

For loans from local banks or credit unions with physical branches, they may advise you to bring your buyer to a branch to finalize the transaction and paperwork in person.
If your loan is with an online lender, they might direct you to a partner bank or financial institution to complete the necessary steps. Understanding these lender-specific processes is vital for a smooth sale.

2. Consider Your Next Vehicle Purchase. If you’re selling your current car to purchase a new one, inform the dealership or your new lender about your existing car loan. They will require the payoff amount and lender details to manage the trade-in or financing process for your new vehicle. For those selling privately while also buying a replacement car, discussing the necessary steps with your lender beforehand is equally important to coordinate the transactions effectively.

3. Evaluate Your Car’s Market Value. Determine your car’s worth using reputable pricing guides like Kelley Blue Book (KBB) or Edmunds. These resources provide estimates for both private party sale value and trade-in value. The private party value reflects what you could potentially get by selling the car yourself, while the trade-in value is an estimate of what a dealership might offer. Generally, private sales yield a higher return than trade-ins. Additionally, consider obtaining a purchase offer from online car-buying services or dealerships. These offers serve as valuable benchmarks and backup plans if your initial selling strategy doesn’t pan out as expected.

4. Calculate Your Equity Position. Subtract the loan payoff amount from your car’s market value. This calculation reveals your equity situation:

Positive Equity: If the result is positive, you have equity in your car. This means your car is worth more than you owe, and you’ll have money left over after paying off the loan.
Negative Equity (Upside Down): If the result is negative, you have negative equity, or you’re “upside down” on the car loan. Selling a car with negative equity means the sale proceeds won’t fully cover your loan balance. You’ll need to pay the difference out of pocket to clear the loan.

With this essential information in hand, let’s explore different scenarios and the steps involved in selling your financed car.

Private Sale with Positive Equity

When your car’s value exceeds your loan balance (positive equity), the selling process is relatively straightforward. Typically, the buyer will make payment arrangements that satisfy both you and your lender.

One common method is for the buyer to pay the full purchase amount to your lender directly. The lender then uses these funds to pay off your loan and remits any remaining balance (your equity) to you. Alternatively, the buyer might pay the outstanding loan balance directly to the lender and provide a separate payment to you for the equity portion. For example, if you owe $5,000 and sell your car for $15,000, the buyer might pay $5,000 to your lender and $10,000 directly to you.

Once the financial transaction is complete, you and a representative from your lender will sign the car title, transferring ownership to the buyer. The buyer then takes the signed title and any other required documentation to their local Department of Motor Vehicles (DMV) to register the vehicle and obtain a new title in their name.

For an even smoother private sale, especially with positive equity, consider securing an unsecured personal loan before selling. If you qualify for a personal loan that covers your entire car loan balance, you can use it to pay off the auto loan. This action releases the lender’s lien on your title, and the title will be solely in your name. While personal loan interest rates are generally higher than auto loan rates, having a clean title in your name can simplify the private sale process and potentially attract more buyers. Just ensure you prioritize repaying the personal loan as soon as you receive payment from the car buyer.

Private Sale with Negative Equity

Selling a car with negative equity (owing more than it’s worth) presents a slightly more complex situation, but it’s still manageable. In this scenario, the buyer will usually pay the agreed-upon sale price to your lender. However, since this amount is less than your outstanding loan balance, you’ll need to cover the “gap” – the difference between the sale price and what you still owe.

For instance, if you owe $10,000 and sell your car for $9,000, the buyer pays $9,000 to your lender. You are then responsible for paying the $1,000 difference to the lender to fully settle the loan. Once the lender receives both payments, they will release the title. You and a lender representative sign it over to the buyer, who then proceeds with registration and titling in their name.

Similar to the positive equity scenario, a personal loan can be an option when dealing with negative equity in a private sale. If you have good credit, you might secure a personal loan to cover the negative equity gap. This allows you to pay off the full car loan and obtain a clean title before selling. Again, remember that personal loans typically come with higher interest rates than car loans, so prompt repayment is advisable.

Trading In a Financed Car

Trading in your car to a dealership while you still owe money on it is a common and often convenient option. Dealerships are experienced in handling financed vehicles and can manage most of the complexities for you.

When you trade in a car with positive equity, the dealership assesses your car’s trade-in value. If this value exceeds your loan payoff amount, the dealership credits the difference towards the purchase price of your new car. This effectively reduces the amount you need to finance or pay out of pocket for your next vehicle.

However, if you have negative equity, the dealership will typically offer to roll the negative equity into your new car loan. This means they’ll add the amount you still owe on your trade-in to the loan amount for your new car. While this simplifies the transaction in the short term, it’s crucial to understand that you’re essentially increasing the total loan amount for your new car. Carefully consider this option, as it can lead to higher overall interest payments and a longer loan term.

Before trading in, it’s wise to explore alternatives like refinancing your current car loan at a lower interest rate. Refinancing could potentially reduce your monthly payments and improve your financial situation, making it a more attractive option than immediately taking on a new car loan with added negative equity.

If you decide to proceed with a trade-in and new car loan, take these smart steps to protect your finances:

Check Your Credit Score: Know your credit score beforehand to understand the interest rates you’re likely to qualify for on a new car loan.
Get Pre-Approved for a New Loan: Obtain pre-approval for a car loan from a bank or credit union before visiting dealerships. This gives you negotiating power and prevents dealers from inflating interest rates.
Know Your Car’s Values: Research both the trade-in value of your current car and the true market value of the car you intend to buy. Use resources like Kelley Blue Book and Edmunds. Be prepared to walk away if the dealer’s offers are significantly below these values. Consider getting quotes from multiple dealerships or exploring a private sale to maximize your return.

Other Transaction Variations

In some less common scenarios, particularly with certain online lenders, you might be required to pay off the entire loan balance before they release the car title. If you have sufficient cash on hand to do this, you can pay off the loan, obtain the title, and then proceed with selling your car.

Alternatively, you can request the buyer to remit payment directly to your lender, with the title being mailed directly to the buyer upon loan satisfaction. This approach might work if you have a trusting relationship with the buyer, such as a neighbor or friend. However, it can be more challenging to convince unfamiliar buyers to follow this process due to the added complexity and trust factor.

Working Effectively with Buyers

When selling a car with an outstanding loan, some private buyers might express hesitation due to the extra steps involved. However, transparency and clear communication can alleviate their concerns. Involving a reputable bank or financial institution in the transaction can significantly boost buyer confidence, as it assures them that the process is being handled correctly and securely.

While it’s not necessary to mention your loan status in your initial car listing, it’s advisable to disclose this information to serious potential buyers before arranging a test drive. Explain the situation upfront and reassure them that you’ve already contacted your lender and are fully aware of the required procedures.

In many cases, selling a financed car doesn’t significantly lengthen the sale process. In fact, finalizing a car sale at a bank, even when a loan isn’t involved, can be a prudent choice. Banks offer a safe and neutral meeting location, and bank staff can often provide guidance on vehicle transaction paperwork, adding an extra layer of security and expertise to the process.

About the authors

Philip Reed

Philip is an automotive expert and syndicated columnist for NerdWallet. He’s a recognized voice in automotive finance, with appearances on national TV and radio. His expertise is rooted in helping individuals navigate the complexities of car buying, selling, and saving money within their automotive budgets.