As a car owner, you may come to a point when you need to sell your vehicle, but you still have a loan on it. While it is possible to sell a car with a loan in Canada, there are some essential things to know. Most importantly, the buyer usually expects you to repay the loan before finalizing the deal. This means you'll need to pay off the loan before receiving the money from the buyer.
However, sometimes the buyer will be willing to give you money before terminating the loan agreement. Other times, you can refinance your car debt into a personal loan to remove the lien on your vehicle. You can then pay off your personal loan when you receive money from the buyer.
In rare cases, you'll have to pay additional money to sell your car. This happens when your loan balance is worth more than your vehicle. This means you'll owe the lender money after selling. However, in most cases, you'll have positive equity in the car. This means your car's value exceeds the loan amount.
- Advantages and Disadvantages When Selling a Car with a Loan
- Selling a Car with a Loan Explained
- The 3 Options for Selling a Car with a Loan on It
- Vehicle Equity
- The Step-by-Step Process of Selling a Financed Car
- Tips for Selling a Financed Car Successfully
- Alternatives to Selling a Car With a Loan on It
- The Bottom Line
- FAQ about selling a car with a loan on it
Advantages and Disadvantages When Selling a Car with a Loan
|– Sell your car earlier|
– Upgrade to a new car
|– Typically need to pay off the balance first|
– Difficulty finding buyers with an existing loan
One of the main advantages is that you can sell your car before paying off the loan. This can be beneficial if you need to get rid of the car quickly or if you want to upgrade to a newer vehicle. Another advantage is that you can use the money from the sale to make a larger down payment on your new car, which could lower your monthly payments.
However, there are also some downsides to selling a financed car. One of the most significant disadvantages is paying off the remaining loan balance before transferring ownership to the buyer. This can be significant, especially if you still owe a lot to the car. Another disadvantage is that you may have difficulty finding a buyer willing to purchase a car with a loan. Many buyers prefer to buy a vehicle outright and may hesitate to take on someone else's debt.
Selling a Car with a Loan Explained
When you take out a car loan, you borrow money from a lender to purchase a vehicle. The lender will hold a portion of the vehicle title until you repay the loan. You only fully own the car once the loan balance is closed. This is to protect your lender because it uses your car as collateral. Failing to make loan payments can result in the repossession of your vehicle.
You typically must clear the outstanding loan balance before transferring ownership when selling a financed car. This benefits you because you'll no longer have payment obligations. It also helps the buyer because they'll own the vehicle under their name.
Buyers are hesitant to buy a car with an outstanding balance because they'll need to trust that you'll pay off the loan with the money. For example, if you didn't pay off the loan, they would have paid the total price for the car with a loan attached. As a result, it's essential to pay off the loan before transferring ownership.
To transfer ownership, you must contact the lender and arrange payment of the remaining balance on your loan. Once done, you can transfer the vehicle's ownership to the buyer. However, different selling options have different nuances. The following section explains more of each option in detail.
The 3 Options for Selling a Car with a Loan on It
By now, you'll understand that you'll usually need to pay off the car loan before transferring ownership. The next step is to figure out who will buy your car. While many people initially think of private sales, there are three options.
Option One: Dealership
Dealerships provide convenience when you are looking to trade in your car. However, you may get less value. The dealer must refurbish and sell your vehicle at the current market rate. As a result, they will need to take a cut of the total. In general, dealers will only work with you when trading in for a new car. However, there are three methods of selling your vehicle to the dealer.
- Trade-Up: You can trade up your car for a newer model. The dealership will apply the remaining balance on your loan as a credit when calculating your car loan.
- Trade-Down: You can trade down to a less expensive car. The dealership will subtract the remaining balance from the new vehicle's price, and you will be responsible for the difference.
- Sell Outright: You can sell your car outright to the dealer, and they will pay off the remainder of your loan. However, this method will provide the lowest value; not all dealers have this option.
Option Two: Private Sale
You can sell your financed car privately, but finding a buyer willing to pay someone else's debt may be challenging. As a result, most buyers require you to clear the debt before finalizing the deal. There are two ways to sell privately:
- Sell Your Car First: Buyers will be skeptical of this approach because they want to avoid paying for the car to be stuck with an additional loan balance. This method uses the car sale proceeds to pay off the loan balance after you sell the vehicle. As a result, the buyer will need to have a lot of trust. To relieve the buyer, you should immediately clear the debt before them by bringing them to a bank branch.
- Pay Off The Loan First: This approach requires making a lump sum payment to the lender and transferring ownership of the car to the buyer. You can refinance your car debt into another loan if you need more cash. For example, you can use a personal loan to pay off the car debt and clear the title. You can then pay off the personal loan after receiving money from the buyer.
Option Three: Sell Online
If you don't have enough time to search for a buyer, you can try selling your financed car online. Since the sale process is streamlined, it makes it easier to match buyers and sellers. The payment process is also automated, so you can quickly transfer car ownership after settling the loan balance. However, you may be required to pay a commission fee if the sale goes through. There are two methods to sell online;
- Online Dealers: Sites such as Clutch act as online dealers where they purchase the car from you and pay off your loan. The benefit of this approach is that you receive an upfront payment and don't have to worry about finding a buyer. However, the value of your car may be affected due to their inspection and appraisal process.
- Online Marketplaces: There are many online marketplaces, such as Kijiji, where you can list your car for sale. The benefit of this approach is that you can find the right buyer and receive the best value. However, you must handle the loan payoff yourself. Most marketplaces require you to provide proof of loan clearance before transferring ownership.
A crucial concept to understand is the equity in your car. Equity is the amount of the vehicle that you own. It's the difference between the car's market value and your outstanding loan balance. For example, imagine your vehicle appraised for $10,000 with a $7,000 loan. In this case, your equity would be $3,000.
This is the amount you'd receive for selling the car. You can also use your equity as a down payment for another vehicle. You can trade up to more expensive cars without requiring a new down payment. However, In some cases, you'll owe money for selling your vehicle instead. This is why it's essential to understand the difference between positive and negative equity.
- Positive Equity: If the car's value exceeds your loan balance, you have positive equity. This means you'll receive money for selling your vehicle.
- Negative Equity: You have negative equity if the car's value is lower than your loan balance. This means you'll owe money for selling your vehicle.
The Step-by-Step Process of Selling a Financed Car
Regardless of your option and method, the overall process is the same. You'll have to determine your car's value and outstanding loan balance. If you decide to proceed, you'll generally be required to pay off the existing loan before transferring the vehicle. The remainder of this section will walk you through the steps in detail.
1. Contact Your Lender: Before you can do anything else, contact your lender and determine your outstanding loan balance. In particular, ask about the “payoff amount.” This is the total amount required to clear your loan, which may include additional fees.
2. Get Your Car Appraised: To determine how much you will receive from the sale, have your car appraised by a professional. This will give you a reasonable estimate of how much your vehicle is worth.
3. Calculate Your Equity: To do this, subtract the loan balance from the car's appraised value. This will give you an idea of how much money you can make from selling the vehicle.
4. Pay Off Your Loan: Before transferring ownership to the buyer, you must pay off the remaining balance of your loan. In most cases, the buyer will require you to pay off the loan before finalizing the deal. However, sometimes the buyer will let you pay the loan after they give you money.
5. Transfer Ownership: Once you pay off the loan and complete the paperwork, you can transfer ownership to the new buyer. You'll also want to ensure the loan has been closed and notify your car insurance provider of the ownership change.
6. Collect Your Money From The Buyer: The buyer typically pays you after clearing the loan. The amount of profit you receive depends on the equity of your car. If there's positive equity, you'll profit from the difference between the car's sale price and your loan payoff amount. If there's negative equity, you'll lose money in the process.
Tips for Selling a Financed Car Successfully
If you decide to sell your financed car, there are a few tips you can follow to make the process go smoothly. First, be upfront with potential buyers about the remaining loan balance. This will help you avoid any confusion or surprises down the road.
Second, ensure the car is in good condition and well-maintained. This can help attract buyers and ensure you get a fair price for the vehicle. Finally, consider paying off the remaining balance on the loan before you sell the car. This can make the process much easier and help avoid delays or complications.
Alternatives to Selling a Car With a Loan on It
Refinancing Your Car Loan
Another option to consider is refinancing your car loan. Refinancing can help you save money on interest and lower your monthly payments. It's also a great way to reduce the remaining loan balance and increase your car's equity. However, you'll typically need a good credit score to qualify for refinancing. This option is best if you want to keep your vehicle but need to lower your monthly payments or reduce the interest rates associated with your loan.
You can also opt for trade-in instead of selling your car directly. This involves trading in your current vehicle for another one at a dealership. In most cases, you can roll the remaining balance into the new car's loan. This is an excellent option to upgrade your current vehicle without paying off the existing loan.
The Bottom Line
Selling a car with a loan can be more complicated than selling a vehicle you own outright, but it is possible. Ultimately, it depends on how much equity you have in the car and the best option. With careful consideration and planning, you can successfully sell your financed car and make a profit.
By understanding the process and following these tips, you can successfully sell your financed car and avoid potential pitfalls.
FAQ about selling a car with a loan on it
The loan must be repaid before your lender releases the car title so you can legally transfer ownership. In most cases, you must repay the remaining balance before selling the car. Potential buyers prefer to buy a vehicle without an existing loan.
However, sometimes the buyer will be comfortable assuming your debt. In this scenario, the buyer will repay your loan directly to your lender. Once you pay off the loan, the lender will release the car's title, and you can transfer ownership to the buyer.
Yes, you can sell your car privately with a loan on it. However, the buyer usually expects you to repay the loan before transferring ownership. You can do this by paying off the remaining balance or having the buyer assume the loan.
You can trade in your financed car at any time. However, you must pay off the remaining loan balance before you transfer ownership to the new buyer. Sometimes, your dealer can roll outstanding debt into your new car loan.
If the car's trade-in value is less than the remaining loan balance, you will have to pay off the difference. If the trade-in value exceeds the loan, you can use that difference to lower your payments or purchase a new car.
If you can't pay off the loan before selling your car, you may be able to have the buyer assume your debt. This option is ideal if you can't pay off the loan, but it is also risky for potential buyers. The buyer will assume your debt, so they need to be comfortable with the loan's terms.
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About The Author: Daniel Schoester
Daniel grew up in Toronto, receiving an Honours Bachelor of Business Administration (Finance) from Wilfrid Laurier University. Here, Daniel became the sailing team's MVP and travelled to Israel for an exchange trip.
Today, Daniel is based out of Lisbon, Portugal. He's passionate about travel, personal finance, and SEO. Some of his most adventurous destinations include Cairo, Rio, and Istanbul.
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