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You financed a new car a few years ago with a five-year loan. But your needs have changed, and you’ve decided to sell your vehicle—even though you still have time left on repaying the loan.
Selling a car with an existing loan is common practice; and with an ecosystem of professionals in the industry to call upon, you can get the help you need to smoothly navigate the process.
Can You Sell a Car with an Existing Loan?
Yes, there are a few ways to sell a car with an existing loan. Keep in mind that if the sales price is less than your loan balance, you will have to pay the remaining balance on the loan. With help from lending institutions and dealerships, along with the state’s department of motor vehicles (DMV), your options include some of the following:
- Pay off the remaining loan
- Sell your vehicle to a used-car dealer
- Sell the vehicle in a private-party transaction
- Trade the vehicle in at a new-car dealership
4 Tips for Selling a Car with an Existing Loan
It might seem daunting, but a little prep work can simplify the process of selling your car with a loan. Here are a few tips that could help:
1. Collect Information on Your Loan
First reach out to your lender, and find out the payoff amount on your loan. This might be slightly higher than the current balance printed on your monthly statement because of interest, prepayment penalties or other fees.
As long as you owe money on the car loan, the lender has possession of the title and effectively owns the vehicle, which is used as collateral in the event of default. You must satisfy the payoff amount before the lender will transfer the title to you.
Your lender can also help you understand what steps you’ll need to take to pay off your loan and sell your car, no matter how you choose to do so.
2. Know What Your Car is Worth
Next, you’ll need to research the current value of your vehicle. With the general supply-chain issues due to the Covid-19 pandemic, the industry is experiencing a scarcity of new cars—which means the market is hot for both new and used vehicles.
You can easily find out the present value of your car by visiting a vehicle valuation site like Edmunds, Kelley Blue Book or Cars.com. You’ll need to know the year, make, model, your zip code and overall condition of the vehicle. Vehicles less than three years old hold greater value, but even vehicles up to five years old are in demand.
3. Consider Your Car’s Equity
Equity is the difference between what you owe on your loan and what your car is worth. If your car’s value is more than your loan payoff amount, your car has positive equity. If you owe more than what your car is worth, your car has negative equity—this is also known as being “upside down” on a loan.
For example, if your vehicle is worth $20,000 and the payoff on your car loan is $25,000, then you’re upside down on your loan because you still owe $5,000
4. Prepare for the Transaction
Whether you have negative or positive equity, the transaction to sell your car typically involves you, the buyer and the loan officer, who will perform the transaction and sign over the car’s title to the buyer. Before this meeting, be sure to ask your lender exactly what you and the seller will need to provide—such as paperwork and money for the sale—to make the transaction as smooth as possible.
The buyer will then take the signed title and other relevant paperwork to their local DMV to get a new registration and title for the vehicle.
How a Private Sale Impacts Your Loan
Before the pandemic, a private sale usually fetched the best price for a used vehicle. But going this route also means you and the buyer will need to do the administrative heavy-lifting on your own. That’s why it’s so important to get the current payoff amount and the documentation the lender requires as well as to ask how the lender wants to handle the transaction.
Remember that the lender must receive the payoff amount in full before the loan officer can sign over the title to the buyer. If you have positive equity in the vehicle, the lender will write you a check for the difference. If you have negative equity, then you’ll have to give the lender the difference out of pocket before the representative will sign over the title to your buyer.
Trading in a Car with an Existing Loan
A dealer trade-in is a relatively easy transaction compared to a private-party sale. If your trade-in vehicle is worth more than the loan payoff amount, the difference will be credited toward the price of the new vehicle. If your payoff amount is more than the trade-in vehicle’s value, the dealer will add the difference into your new vehicle loan.
Alternatives To Selling Your Car
If you’re not sure whether selling your car is the right choice for you, there are some other options to consider.
Talk With Your Lender
Your lender holds the title to your vehicle, so they should be your first point of contact. They want to see the outcome of this transaction come out smoothly for you as their customer, as well as for themselves as the lienholder on the vehicle. Your lender can help you get your payoff amount, navigate the steps to sell to a private party or see the interest rate you qualify for if you decide to trade for a new or used vehicle.
Refinance Your Loan
By talking with your lender first, you might decide that your best course of action is to keep your current vehicle and refinance your loan instead of selling the car. Depending on your credit, refinancing might get you a lower interest rate—which could save you money on your monthly payments and potentially help you pay off your loan faster.
Or you might opt to extend your repayment term to get a smaller monthly payment. Just keep in mind that if you choose a longer term, you’ll pay more in interest over the life of the loan.
Tap into Your Savings
If you have a sizable savings account and want to avoid taking on more debt, you might consider paying off your car loan with your extra cash. However, make sure you have enough emergency savings after paying off your car loan to cover any unexpected expenses.
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