Can I sell my car before paying off my loan?

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Generally speaking, a car loan is a long-term commitment that can last up to five years or more. So what if you have to sell your car before you pay for it?

It is not uncommon for circumstances to change, so for some reason you have to unload your car before the end of its loan term, it can be a relief to know that it is doable. There may be a few more steps in the process.

The obvious reason is that if you still owe money on your car, it is not entirely yours.

If your car loan is secured by the car itself – which is likely, especially if it was purchased new – then the car is classified as encumbered. Buying an encumbered vehicle can be seen as a considerable risk for a potential buyer because if you do not pay back the loan after you sell the car to them, the buyer could be repossessed of their car.

This risk can be reduced or eliminated, however, if the transactions occur at the same time.

On the other hand, if you have financed your car with an unsecured auto loan, the repayment will be your responsibility.

Either way, it’s important to be transparent with potential buyers when selling an underfunded car. Communicating about how you plan to overcome any risk they might face will give them confidence in the purchase and thus reduce the risk of losing their interest.

That said, it’s just as important for used car buyers to protect themselves by consult the register of movable securities (PPSR) before buying a car, to see if there are any security interests registered against it.

What steps do I have to take to sell my financed car?

Selling a car under financing can be a straightforward process if you know what steps you need to take. Consider the following to get you started:

Step 1: Contact your loan provider

Once you have decided to sell your car, the first step is to contact your lender and tell them that you are considering selling. You can then discuss your options for repaying the outstanding amount. Be sure to educate yourself about prepayment and exit fees and factor them into your total amount owed, to ensure that you don’t end up in an unwanted financial situation after selling your car.

If you have enough money to cover the unpaid amount plus any charges to pay, you can optionally choose to pay it off before you sell your car to remove the charge and / or streamline the process.

Step 2: List your car for sale

After talking to your loan provider, it’s time to put your car up for sale. Consider taking the opportunity to disclose your car’s ownership status on the listing. If you withhold the information and an interested buyer views the car on PPSR, they might think you are being dishonest and you might lose the sale.

Step 3: Wait for an offer from a buyer

You can choose to wait until you receive an offer to let the buyer know that the car is being financed and how you plan to pay it back. But again, this can lead the buyer to believe you have been dishonest, and they may wonder if there are other details about the car that you haven’t been transparent about.

If you have already discussed the status of the car with the buyer and are happy with their offer, then you can proceed with organizing the payment process.

Step 4: Complete the transaction

If you plan to use the money you receive from the sale of the car to pay off the loan, you should be able to do so all at once with the bank where your loan is held. This way, the buyer can be present to witness the repayment of the loan before the property is transferred to their name.

Keep in mind that if you sold the car for less than the outstanding loan amount, you will be responsible for closing the gap before the deal is completed. On the other hand, if you sold the car at a higher price, you should collect the deductible after the overdue amount is covered.

Step 5: transfer ownership

Once your loan is paid off and the charge on the car is lifted (if any), the car can then be transferred to the name of the new owner. As the previous owner, you are responsible for file a notice of disposition within 14 days of the sale. The rest of the process is up to the new owner.

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