During the pandemic, more customers bought out their leases than usual. Between the combination of rising new car prices, an uncertain economy, and inventory shortages – plus the hassle of shopping for a new car during a worldwide health emergency, driving a three-year-old vehicle seemed like the wiser choice. Especially since most people hardly put any miles on their car during this time, with no daily commute or long-distance travel.
But now, as people have returned to work and started to take road trips, your love affair with that older car may be waning. As new car prices drop, you’re eyeing the latest models with desire. Unfortunately, since you took out a loan when the car was three years old, you might be only a few years into your payments.
You want to trade in or sell your car and get something new, but that loan sits like an albatross upon your budget, blocking your dreams of a nicer vehicle.
I’m in this situation right now, with kids who want to take their friends on our fun road trips and a 2017 compact SUV that barely holds my family and our luggage.
So I did some digging to find out how to sell your car with an existing loan. And, it turns out, it’s not as hard as you might think, as long as you clearly understand the steps involved and a strategic approach.
Selling Your Car with a Loan in 5 Steps
Understanding the ins and outs of selling a car with a loan is vital to avoid financial pitfalls and ensure a smooth transaction. To help you get started, we’ve broken down the process into five manageable steps. So, whether you’re dealing with positive or negative equity, planning a trade-in or private sale, this comprehensive guide has got you covered. Let’s dive right in.
1. Determine Your Loan Payoff Amount
The key to successfully selling your car with a loan starts with figuring out your loan payoff amount. Unlike the loan balance you see on your monthly statements, the loan payoff amount is what it would cost to completely close your auto loan right now. This amount is often higher than your remaining loan balance, as it may include accrued interest and any prepayment penalties or fees associated with the loan.
To get the loan payoff amount, reach out to your current lender. This could be a bank, a credit union, or another type of financial institution. When contacting them, you’ll typically need your account number and possibly the vehicle identification number (VIN) of your car. Request the payoff amount and also inquire about the payment methods they accept.
If you pay your bill online and have financing through your dealer or manufacturer, your account may show your payoff amount. That will make it easier to look it up.
Keep in mind that due to interest accrual, the payoff amount can change daily. As such, it’s advisable to ask how long the quoted payoff amount is valid to ensure you have an accurate figure when making decisions. Again, your online account will show the current payoff amount right next to your next payment due.
2. Assess Your Car’s Market Value
Knowing the loan payoff amount alone is not enough; you also need to understand your car’s market value. In this case, online vehicle valuation sites such as Kelley Blue Book can be an invaluable tool.
These sites give an estimated market value for your car based on specifics like the make, model, year, mileage, and overall condition. Honesty is key when describing the condition of your vehicle, as overestimating can skew the estimated value and lead to unrealistic expectations.
Assessing your car’s market value allows you to understand whether you’re dealing with positive or negative equity. If you’re lucky and your car’s value exceeds the loan payoff amount, you have positive equity. This means you can sell your car, pay off your loan, and still have money left over.
On the other hand, if you find that your car’s market value is less than the loan payoff amount, you’re dealing with negative equity, often referred to as being “underwater” or “upside down” on your loan.
In this situation, selling your car won’t generate enough money to cover the loan payoff, leaving you with a gap to fill. Don’t panic; while it complicates things, it’s still possible to sell a car in this position, as we’ll explore further.
3. Decide on a Selling Strategy
Now that you’ve got the necessary numbers, you’ll have to choose how to sell your car. Here are a few options:
Trade-In
A trade-in can be a convenient option, particularly if you’re already planning to buy a new car. Dealerships make it easy as they handle all the paperwork and pay off your existing loan.
If you’re underwater on your loan, some dealerships may offer to roll over the negative equity amount into your new car loan. But tread carefully—this means you’ll still owe money from your old car, and it’ll be added to your new loan. You could end up with a new loan that’s larger than the value of the new car you just bought, potentially leading to higher monthly payments and interest costs.
However, this is one way to get rid of an older car you’ve grown to hate, as long as the new monthly payments work with your budget.
Private Sale
If getting the most money from your used car is your top priority, consider a private sale. When you sell to a private party, you typically can set a higher sales price than what a dealership might offer. It also offers the best option for those dealing with negative equity, as you’re likely to fetch a better price that can help cover the deficit. Plus, when you take out a new car loan, you’ll only pay for your new car, and not the older vehicle that you traded in.
However, keep in mind that a private sale requires more effort. You’ll need to advertise, negotiate the price, and handle the paperwork. Then, you’ll have to use the cash to pay off your current loan – or as much of it as possible.
Direct Sale to Dealership
Selling directly to a dealership or used car lot—without buying a car from them—can be a convenient middle ground. It saves you from the time and hassle of selling privately, but it might still fetch a better price than a simple trade-in.
Make sure the price covers your loan payoff if dealing with positive equity. If you have negative equity, though, you’ll need to pay the difference.
4. Handling the Transaction
The manner in which you handle the transaction varies based on your chosen strategy and whether you’re dealing with positive or negative equity.
If You Have Positive Equity
When you sell a car with positive equity, you’re in a relatively good position. In a private sale, the private buyer pays you, and you can then use these funds to pay off the auto loan. The remaining money is yours to keep or use for a down payment on your new vehicle.
If you’re trading in your car, the dealership typically handles the loan payoff directly. It’s unlikely you’ll fetch additional cash from the deal but, if you do, it would be applied to a down payment on your new car.
If You Have Negative Equity
Selling a car with negative equity is more complex. If possible, consider covering the gap between the sales price and loan payoff amount using your savings. If you don’t have enough savings, you might explore getting a personal loan to cover the difference. This approach essentially transfers the debt from your car loan to a personal loan.
In some cases, if the buyer agrees, the lender might allow you to transfer the remaining loan balance to a new loan for the buyer. However, this can make the sale more challenging and it’s less common in private party sales. Be ready to clearly communicate and negotiate with the buyer about the loan situation.
If you’re trading in your car to a dealer, the option exists to roll the existing loan amount into your new loan. That will increase your monthly payments, but at least you’ll drive away in a vehicle that fits your lifestyle and needs today.
Fortunately, used cars are still elevated in price due to shortages, so your car may be worth more than you imagine. If you find the right dealer, they might even buy out your existing loan to let you drive away in a new car without the burden of your old debt.
5. Transfer of Title and Loan Closure
The last critical step in selling your car with a loan is the transfer of title and loan closure. This phase seals the deal and is crucial for both parties, protecting the buyer’s rights to the vehicle and releasing you from further obligations towards the car. Here’s what you need to know:
Transfer of Title
The car’s title or “pink slip” proves ownership of the vehicle. When you sell your car, you must transfer the title to the new owner—whether it’s a dealership or a private buyer. This process varies from state to state, and even from one transaction to another.
Generally, you’ll need to sign and date the title, and the buyer will do the same. If the transaction happens remotely, it’s advisable to use a secure method, like registered mail, to send the title.
In some cases, your lender might hold the car’s title until the loan is fully paid off. If that’s the case, once the loan is cleared, the lender will release the title, sometimes directly to the buyer, or to you to sign over to the buyer. Be sure to understand your lender’s process in advance.
Loan Closure
Once the loan is paid off, inform your lender that you’ve sold the car and the loan is cleared. They should provide you with a document—usually called a “lien release”—to confirm that the loan is fully paid and closed. This document is proof that you’ve met your loan obligations and are no longer financially tied to the vehicle. Keep this document for your records.
Remember, closing out your auto loan can also have an impact on your credit report. After selling and paying off the loan, monitor your credit report to ensure the closed account is correctly reflected and your credit score is updated accordingly.
Closing a loan could temporarily reduce your credit score by reducing the average length of your accounts. If you don’t open a new car loan, it could also affect your “credit diversity” or “credit mix,” which is a small factor in your FICO credit score. But the fact that the loan was paid in full will reflect positively on your credit report.
If you open a new loan for another car immediately, you’ll maintain your good credit mix, but will get dinged a few points on your credit score for opening a new account. Additionally, if you apply for a car loan, you will lose a few points on your credit score for a “hard” credit inquiry. Fortunately, it’s easy to bounce back by paying your credit card bills and loan payments on time consistently.
Bottom Line
Selling a car with a loan can be complex, but it’s far from impossible. Understand your loan payoff amount, assess your car’s market value, and choose a suitable selling strategy to minimize hassle or loss. Finally, you want to handle the transaction properly and ensure all the paperwork is completed, to make sure everything goes smoothly. While it can seem daunting, remember that millions of people have been in your shoes – and have successfully sold their car with a loan.
