Can I Sell My Car if I Haven’t Paid It Off?

Can You Sell a Car if It Isn’t Paid Off?

You’re ready to buy a new car and get rid of your current one. However, one thing is standing in the way: You still owe money on your auto loan. What happens next depends on who’s buying your car.

If you’re trading in the car in for a new one or selling it to a dealership, the process of paying off your auto loan is handled by the dealer. When you pay for your new car (or take out a new loan), the dealer pays off the balance of your previous loan, typically by sending the money to your bank or credit union. If you’re trading in the car and the dealer values it at more than what you owe, you can pocket the difference or put the extra money toward the purchase of your new car.

Once the car is traded in or sold at a dealer and the loan is paid off, the lender will release its lien on your car. Under a lien, the lender holds the title to your car and is legally its owner until the loan is paid off. This enables the lender to sell your car if you default on your loan.

The situation is a bit stickier if your trade-in is worth less than what you owe. In this case, the dealership typically “rolls over” the amount you owe on your current loan into the loan for your new car. This essentially pays off the old loan.

If you’re selling your car to a private buyer and still owe money on it, then the situation gets even more tricky. You’re unable to transfer the title to the buyer until the loan is paid off.

In a private transaction, you might want to complete the sale at the location of the current lienholder (such as the bank or credit union where you got your car loan). This way, you can use the money from the buyer to pay off the loan and hand over the car title to the buyer right away.

Another option is to have the buyer assume your loan payments. However, many lenders don’t allow this. And if a lender does allow it, the buyer must meet the lender’s qualifications for a new loan, including minimum credit score and maximum debt-to-income ratio (DTI).

Whatever route you choose for selling your car, be sure you ask your lender about prepayment penalties, title-transfer requirements and other details.

Selling With Positive Equity vs. Negative Equity

When you’re selling a car and still owe money on it, you’ll want to consider whether you’ve got positive equity or negative equity. Positive equity means you owe less than what the car is worth, based on its current market value, while negative equity means you owe more than the car is worth.

If you owe $15,000 on your auto loan, for example, but the trade-in value is $17,500, you’d be left with positive equity of $2,500 (trade-in value subtracted by loan balance).

If you’re selling a car with positive equity to a dealer, the dealer typically handles the loan payoff for you. If you’re selling a car with positive equity to a private buyer, you’ll use the sale’s proceeds to pay off the loan, then pocket the difference.

Now, if you owe $17,500 on your auto loan and the trade-in value is $15,000, you’d be left with negative equity of $2,500 (loan balance subtracted by trade-in value). This is also known as being “upside down” on the loan.

With positive equity on your side, the sale of your car can make a lot of financial sense. You may make more from the sale of your car to a private buyer than a dealership, but the sale process tends to be smoother with a dealer. No matter who the buyer is, you’ll come away with money from the deal if you have positive equity.

What if you have negative equity? You may want to hold off selling your car until the equity goes from negative to positive. Or, you might consider buying a cheaper car (if your dealership plans to roll the remainder of your first auto loan into your new loan) to soften some of the effects of your negative equity. Additionally, you might look into selling the car to a private buyer instead of a dealer, as you might score a higher sale price that would offset the negative equity.

How to Sell a Car With a Loan

Here are six steps to take when you’re selling a car with a loan:

1. Figure out the value of your car. Websites such as Kelley Blue Book and Edmunds provide tools for determining how much your car is worth. You also might try the AutoCheck valuation tool.
2. Contact your lender. Ask your lender for the payoff amount of your loan, and inquire about prepayment penalties and other details.
3. Add up the equity. Do the math to determine whether you have positive or negative equity.
4. List your car. If you’re seeking a private buyer, you may want to post a for-sale ad online.
5. Work out the price. Whether you’re dealing with a dealer or a private buyer, negotiate a price that’s fair for both sides.
6. Pay off the loan. Once you’ve arranged a trade in or sale, put the proceeds toward paying off your auto loan. An alternative is to pay off the loan with money from savings or a personal loan, and then repay yourself once the car is sold.

The Bottom Line

If you have a car with a loan, review your lending agreement before trading in the car or selling it. Once you’ve settled on how you’re going to pay off the existing loan, you might need to explore lending options for your new car. As you’re examining the lending options, check your credit score and Experian credit report to see where your finances stand.