3 Steps to Selling Your Car if You Have an Existing Loan
8 MIN READ
Published September 29, 2023 | Updated October 26, 2023
If you want to sell a financed car, you may be unsure of how to sell a car with a loan. While it’s not difficult to do so, there are a few steps involved in the process that may make it longer. You can sell the car to a private buyer or trade it in at a dealership, but you’ll need to know how much you owe on the loan and compare it to how much you can get when you sell it. If your loan is underwater, you may have to cover the difference out of pocket or refinance the loan.
Here are the three steps to follow when selling your car with an existing loan:
1. Determine the Value of Your Car
Before you can sell a car with a loan, you’ll need to find out how much it’s worth. This will help you determine if you have any equity left in the vehicle and if you need to pay anything to cover the difference between the selling price and the amount you owe to the lender.
Get an Appraisal
Use online tools like Edmunds or Kelley Blue Book to determine the value of your car. You can also get an appraisal for your car from a local dealership. Used-car buyers like CarMax and Carvana can also give you a valuation. You’ll have to provide basic information about your vehicle, such as the year, model, make, location, and vehicle identification number (VIN). Be honest with the company about the condition of your car to get an accurate appraisal.
Know How Much You Owe
Contact your lender to know your payoff amount. This amount may be different from your current balance on the loan because it also includes fees and interest up to a specified date. The payoff amount your lender gives you is usually valid for ten days. Once you know the payoff amount and the value of your vehicle, you’ll know how much equity you have in the car. The equity will be the difference between the value of your vehicle minus the payoff amount. Be sure to review your loan contract’s Truth in Lending Act disclosure to check if there is a prepayment penalty if you pay off your loan.
2. Pay Off Your Loan
In most cases, the lender will ask you to pay off the loan before they release the vehicle’s title to the buyer. If you have positive equity in your car, the lender will send you the difference. But if you have negative equity, you’ll have to pay the lender the difference before they’ll transfer the title to the buyer. There are a few ways to get out of the car loan so you can sell it successfully.
If you can’t pay off the car loan outright, consider refinancing it at a lower interest rate. You can also extend the repayment period to make the monthly payments lower so it will be easier for you to repay. Refinancing at a lower interest rate can bring down your total loan cost. It may also help you move into positive equity faster.
Negotiate with the Buyer
If you have negative equity, the process of selling can be more complicated. You’ll have to pay the lender from the sale proceeds and the remaining amount out of pocket to cover the difference. Discuss your options with the lender to see if they have refinancing options or other repayment options that may help. If you’re planning to buy a new car, you can roll the negative equity into the next auto loan. If you plan to do this, make sure you fully understand the terms because the car payments will be higher, and your new loan will be immediately underwater.
3. Sell Your Car
If you’re planning to buy a new car once you sell your current car, you’ll need to pay the payoff amount to the lender. You’ll also have to provide lender information to your new lender or the dealership. If you’re planning to sell the car privately, you’ll likely have to bring the buyer to the lender’s office to sign the paperwork or work with a bank partner to complete the transaction online.
If you’re planning to sell the car to a private party, you’ll need to advertise your car online. You can either list it on websites like Vroom and Carvana or use marketplaces like Facebook or Craigslist. Regardless of the option you choose, it’s important to understand how to sell the car with a loan if you have positive equity vs. negative equity.
If your car has positive equity, the buyer will pay the price of the car to the lender, and your lender will then pay the difference to you. For example, if you owe $5,000 on your car and the buyer is paying $10,000 for it, you’ll get $5,000 out of the transaction.
If you have negative equity, the buyer will pay the sale price of the vehicle to the lender. You’ll have to cover the difference. For example, if you owe $10,000 on the car loan and the buyer pays $8,000 for it, you’ll still need to pay the remaining balance of $2,000 to the lender for title transfer.
Teresa Dodson, debt expert and founder of Greenbacks Consulting, cautions consumers against paying for the difference. “If you’re upside down and have negative equity in your car, the best option is to refinance at a lower interest rate if you can qualify. If you roll the negative equity of the existing car into a new car loan, you may never come out ahead,” Dodson explains.
If you have good credit, you can try to prequalify for a personal loan to see if you can get a lower interest rate.
Transfer the Ownership
Once you advertise the car and negotiate the price of the car, the next step is to finalize the sale and transfer the ownership of the vehicle. Set up an appointment to work with the lender to complete the process. Your buyer will pay the car’s purchase price to the lender. If you have negative equity, you’ll pay to cover the difference. You’ll give the buyer a bill of sale, and the lender will release the car’s title to the new buyer.
You’ll need to work with the Department of Motor Vehicles (DMV) and the lender to transfer ownership to the new owner. In case of a private sale, the buyer and seller will have to handle all the paperwork.
How To Trade Your Car (Instead of Selling)
One of the easiest ways to sell a car with a loan is to trade it for a new one. Negotiate with the car dealership to ensure you get the best possible deal by taking into consideration your car’s value and the outstanding loan balance. The dealer will handle the paperwork, which makes the process easier. If you have positive equity, the dealer will give you a credit that you can use towards your new car.
If you’re upside down on the auto loan, the dealer will offer to roll the negative equity into the new car loan. Be careful with this option because it means you’ll be taking out a larger loan. When taking out a loan for your next car, check your credit report beforehand to see what APR you qualify for. Know your present car’s trade-in value and the new vehicle’s true market value. Get a pre-approval before going to the dealership.
The Bottom Line on Selling a Car with a Loan
It takes more time and planning to sell a car when you have an outstanding loan on it, but you can do it successfully by working with the lender and ensuring the buyer is aware of your situation. Start by knowing your car’s market value, loan payoff amount, and equity. Work with the lender to complete the transaction and transfer the title to the buyer.