Is It Illegal To Sell A Car Under Finance?
No, it’s not illegal to sell a car that’s still under finance – but the process can be difficult. Because the car is under finance, you’ll be selling something you don’t technically own. This means you need to make sure you know exactly what you’re doing.
Here’s everything you need to know if you want to sell a car under finance. Let’s start with the basics.
What is a car under finance?
A car ‘under finance’ is a car that was bought with borrowed money. This normally means you took out a car loan with a financial institution or dealership before you purchased the car.
When you see car ads featuring a low interest rate (or not so low with recent interest rate rises!) for a certain number of years, the company is actually advertising their car financing product, not the car itself.
When it comes to selling a car under finance, the general approach is to use the money from the sale to pay off the loan right away. However, due to the peculiarities of car loans, it gets a little complicated…
What does ‘encumbered’ mean?
A car under finance is considered ‘encumbered’ when you loan from a dealership. Most (but not all) cars sold under finance use what’s known as a secured loan, where the car itself is the security for the loan. Basically, if you can’t make your repayments, your lender can repossess the car, then sell it off to cover your outstanding balance.
Now, when trying to sell an encumbered car, things get tricky. The loan essentially applies to the car, not the buyer. The buyer is responsible for repaying the debt, but because the car is the security for the loan, the outstanding debt will always apply to the car itself. This is what is considered the ‘encumbrance’.
So, even though it was you who took out the loan, if you sell the car to a new owner but fail to pay off the loan, the car can still get repossessed – even if you technically don’t own it any more. The new owner would then have a pretty solid case to sue you!
As a result of this, if you want to sell a car under finance, while not illegal, it does become quite a bit more difficult. But not impossible!
Know your loan
The first step toward trying to sell your car under finance is to understand what sort of loan you have, and make sure you know the implications.
If you borrowed money to buy your car, it doesn’t necessarily mean your car is encumbered. If you got a personal loan, or paid with a credit card, you’re using an unsecured line of credit, and the car is not the security. Another common way to finance a car is to redraw against a mortgage. In this case the house is the security, not the car.
The difference between secured and unsecured credit is why you tend to get better rates on car and home loans than you do on personal loans or credit cards. With a secured loan, there’s a physical asset to act as security, so your lender has assured repayment of the loan.
How to sell a car under finance
So, you know what type of loan you have, and you think you can make it work. What now? There are a few more steps to take before you exchange papers.
Talk to your lender
The very first thing you should do is talk to your bank or lender. You need to work out exactly how much you owe on the car, and if they have a procedure you need to follow. You also need to find out if they charge any fees for paying your loan off early.
Reassure the buyer
Firstly, you need to make sure you are upfront with the buyer about the loan.
Understandably, many people won’t want to buy a car that’s financially encumbered. Because it’s their money going towards your loan, they’ll want to be reassured you’re using it to pay the debt, and not leaving them to have their new car repossessed.
There are a couple of ways people tend to make this work. You can take the buyer with you to see your lender to go over the details; or, you could get a statement from your financial institution showing how much you owe, to ensure you’ll be receiving enough from the sale.
Some lenders will accept payment directly from the buyer, bypassing you entirely. If the amount you’re selling your car for is more than you have left to repay, the buyer can split the payment between you and your lender.
Finally, you could pay off the loan before you sell the car. This requires you to have enough free cash to cover the loan, but it saves a whole lot of hassle when you sell the car. You may also get a better price for it too.
No matter what you do, always be honest. Most savvy buyers will get a history check on the car or search it on the Personal Property Securities Register to make sure it’s not still under finance. Being dishonest about your situation could cost you the sale.
Make the sale
Just because your car is under finance, it doesn’t mean you won’t be able to sell it. If it’s a good deal, and you reassure your buyer, there will be plenty of people willing to do the deal. When you find one, make sure you follow all instructions from your lender, and keep a track of all the other paperwork you need, such as transfer of ownership and proof of purchase papers.
Is having a car worth the effort?
Selling a car – under finance or not – is one of the many painful experiences you’ll have if you own a car. Maintenance, rego and insurance, and even the process of buying and selling a car is a huge hassle, and a massive financial expense. You’ve probably noticed a massive increase in the cost of new and used cars over the past few years and the cheapest new car in Australia will now set you back more than $8,500 per year!
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