So you have spotted a luxury model on the used car marketplace which fits your budget? And it was love at first sight? Now your problem is that you need to dispose the old car before you can get the new one into your home. An even bigger problem is that your old car is a financed one. And selling a financed car is not easy as you have to keep 3 parties happy: your lender, your buyer and you.  But there is a solution for everything. So, Let’s find out the process involved in selling a financed car.


First, understand the details of the vehicle loan

It’s all about how vehicle loans work. Car is used as a mortgage or safeguard by banks or any financial institution, so in case you can’t make repayments the vehicle will be repossessed and will be sold to reimburse the loan amount. Car loan comes under secured loan as vehicle here is security. The problem here is the outstanding debt is to be paid by the buyer as the car forms the foundation of the secured loan. This is known as encumbrance.


If you have borrowed money keeping your home as mortgage to fund the purchase then your car is unencumbered. In that case you have to repay the debt, not the further buyer. Moreover the lender can’t take the car in case of non-payment. If there is no security for the debt, then vehicle becomes the mortgage and the lender can repossess it. Here the vehicle is encumbered.


Second, plan the action items

  • When you decide to sell your old car, you need to talk to your bank or lender prior to the sale
  • If you wish to pay the outstanding before selling the car then be informed that you have to pay some extra fees.
  • These fees are cost-recovery fee, administration fee and a break fee, which may vary from lender to lender. So you need to be sure about the cost before selling your vehicle.
  • You may need to enquire about the current selling price of the vehicle before paying the outstanding debt.
  • In case you fall short of cash to pay the debt, organize the sale in the lender’s office itself, so the lender/bank gets the outstanding upfront from the buyer.
  • If you think the sale price is lower than the loan amount, you might consider removing the encumbrance.  You should redraw the debt from the vehicle and put it against any other property.

In case you are buying a new car from a dealer instead of a used car, you can also consider the exchange offers that these dealers provide, rather than selling your old car outright to a buyer. Furthermore, car dealers can arrange money to pay out your outstanding which will also cover the cost of upgrading to a new car. However, in all situations, always be clear and honest about the outstanding part while selling.

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