It’s relatively easy to trade in a car or sell a car on which you still owe money — in most cases, it requires just a few extra steps. You can sell it even before you make the first payment, though as a general rule, the sooner you sell, the more money you stand to lose compared to the price you paid, particularly if you bought a new vehicle. On depreciation alone, the average new vehicle can be worth thousands less as soon as you drive it home.
Still, there are reasons you might be willing to swallow the expense. You might hate the car that seemed so good on the test drive, or your needs might change quickly — you love your Mazda MX-5 Miata until the pregnancy test comes up positive, or changes in your financial situation make the payment a burden.
Determining whether it’s worth selling or trading in a car with a loan on it should start with getting your payoff amount statement from the lender, including any interest, fees or possible prepayment penalties. You also need to research the current value of your vehicle (you can use Automotiveng.ng car-pricing guide to get your car’s value).
Comparing what you owe with what your car is worth might make keeping your current vehicle look better, particularly if you owe more than it’s worth. If you owe more than what it’s worth, you’ll have to come up with cash or add the difference to your next loan to unload it. If the current car’s payments alone are your issue, you could explore refinancing the loan for more affordable terms.
But if you’re still set on making a change, keep in mind that your current lender is part owner of your vehicle and is listed on the title as the lienholder, and they may even hold the title. No sale can be completed until the loan balance is paid.
Here are some strategies to sell before your car is paid off:
You’ll have more sale options and can simplify the process if you can come up with money to pay off the loan and get a clear title to the car ahead of selling. Having a clear title is particularly advantageous if you plan to sell to a private party, which might get you the highest price. “A title in hand can make a private-party sale much easier,” says Philip Reed, automotive columnist at financial advice site NerdWallet.
You might be able to swing the payoff with savings, help from a relative, borrowing from a retirement account, getting a home equity line of credit, getting a short-term personal loan or getting an unsecured loan on your personal credit. Proceed with caution, however, because you’ll only want to get a short-term loan if you can quickly pay back the source after the sale, particularly if you used a relatively high-interest personal loan.
If you’ll be getting a replacement car, new or used, it’s fairly easy to trade in a car with a loan outstanding. It’s the next-easiest way to go if you can’t pay off the loan first. Most dealers will handle the details of the transaction and pay the lender. If your trade-in is worth more than you owe, you’ll get the difference — your positive equity — as a credit toward the new car’s price.
It’s still fairly easy if you owe more than the trade-in is worth, which can happen if you took a long loan and are trading in the first two or three years. Dealers may offer to wrap your negative equity into the loan on your new car, though you’ll pay more in interest and perhaps need a longer loan to keep the payments affordable.
“Tread carefully with this option because it means you’re actually taking out a bigger loan for the next car,” says Reed.
Either way, be sure to negotiate the price for your trade-in as if you owned it to be sure you get full value for the car you’re giving up. Comparison shop lenders to be sure you’re getting a good interest rate on the new loan; don’t feel like you have to settle at just one dealer. And after the deal is done, it’s a good idea to check with the lender to be sure the loan has been cleared.
If you are not trading for another car, you still can do a relatively simple transaction at a dealer that buys used cars without requiring a purchase in return. Their individual procedures will vary, but again, the dealer will handle most of the details involved in paying the lender and getting the title to the vehicle. If your car is worth more than you owe, they will deduct the loan payoff from their offer and give you a check for the difference. If you owe more than the offer, you’ll have to pay the difference to make the sale — painful, but you’ll be rid of the car, its payments and its associated expenses, such as insurance and taxes.
While this might get you the best price for your old car, it also will likely be the most complicated and potentially stressful way to sell. Making sure the details to complete the sale and transfer the vehicle’s title will be on you and the buyer, and some potential buyers might be reluctant to deal with that.
“You don’t need to put this loan information in your classified car listing,” says Reed. But once you feel you have a serious buyer, explain the situation before arranging a test drive. Tell them you’ve talked with your lender and know the exact steps required.
You’ll need information from your lender on the payoff amount, the paperwork they require and information on how they want to handle the transaction — the lender will want to be sure they’re paid before you and the lender’s rep sign over the title to the buyer. Depending on the lender, they might want the buyer to write a check for the full amount; the lender will then give you a check for any positive equity, or you’ll have to write a check to the buyer for negative equity. Alternately, the lender might require only the buyer to pay the loan balance, and payment for positive or negative equity is between you and the buyer.
If your loan is at a bank or credit union, they might want these exchanges done at a local office. An online lender might have a local partner. There also are third-party escrow services that handle all of the payments for a fee.
“Involving a bank or recognized financial institution will give the buyer confidence that it’s being done correctly,” says Reed. “In fact, closing a car deal at a bank is a good idea even when a loan isn’t involved. It provides a safe meeting place and, usually, bank employees can answer questions about vehicle transactions.”
Beyond the lender’s requirement, you also need to check with your state’s motor vehicle department to know what fees and additional forms are required to legally transfer ownership, such as a bill of sale or a document verifying that you no longer own the vehicle. In some states, such information and documents are available online, but some states also require an in-person appearance at the DMV to complete the transaction.