If you're planning on buying a new car or a used car, you'll likely need to sell your old one first. And that can be complicated if you have an auto loan. That's because the lender has a legal interest in your vehicle, and you can't just sell it without addressing that claim.
The good news is, while figuring out how to sell a car with a loan can be complicated, it's not impossible. And some methods make it easier to transfer ownership than others. Here's what you need to know.
How to sell a car with a loan: What to do first
The first step to figuring out how to sell a car with a loan is to gather payoff information about your current auto loan. You'll need to find out the outstanding loan amount because the balance will need to be paid off in full before you can transfer your car's title to a new owner.
See, the title determines who has a legal ownership interest in the car. When you have a car loan, the lender has a lien on the vehicle because they have a claim to it. The lender typically holds onto the title while you still have a loan. A new buyer can't take ownership until the lender has been paid in full, the lien has been released, and the lender gives the owner the title so the owner can do a title transfer to the buyer.
By finding out the payoff amount, you will know exactly how much money you need to repay your loan amount in full so you can make sure you transfer a clear title to the new owner.
You should be able to check the outstanding balance of your auto loan by signing into your loan account online or calling your lender. Your auto loan should also show up on your credit report, so you can find information about who your lender is and what your recent outstanding balance was if you aren't sure what lender to contact.
Research your car’s value
Researching the value of your vehicle is another early step in the process of selling a car with an outstanding loan. It’s important to know the value of your vehicle so you can decide how much to list it for — and so you can negotiate a sale price when you find a potential buyer.
But there's another reason this is important. If you can't sell the car for enough money to pay off the entire loan, you're classified as being "upside down" on your loan. This would mean you'd need to come up with the extra money to pay your loan in full before selling. So if you owed $10,000 and your car would sell for just $9,000, you’d have to pay the additional $1,000.
Once you know both your car's value and the payoff balance of your loan, you can determine if you’re likely to be upside down. If it turns out you are, you may either reconsider selling until you've paid down more of your car loan or start making a plan to come up with the extra money you'll need.
You can estimate the value of your vehicle using many different online websites, including Kelley Bluebook, AutoTrader, and Edmunds.com. The value will be affected by the way you sell your car as you can often get more money from a private buyer than a dealer. Most of the websites allow you to get valuations for both options.
Selling a car with a loan: 5 different options
When deciding how to sell with a loan, you have five different options. The one that's best for you may depend on the value of your car, the outstanding loan amount, the level of hassle you're willing to endure, and how comfortable you are with arranging a title transfer on your own.
1. Private sale with positive equity
If you can sell your car for more than it costs to repay your loan, you can consider a private sale with positive equity. That means you'll sell to an individual buyer, the buyer will pay you at least enough money to repay your loan in full, and you'll pay back your lender with the proceeds and keep anything left over.
If you got your car loan from a dealer or any local bank or credit union with a physical branch, this process can be pretty straightforward. You and the buyer can make an appointment to meet with the lender and manage the transfer of the vehicle. The buyer will pay the agreed-upon price, the money you owe will be taken out and paid to the lender, and the lender will transfer the title to the buyer.
If your lender doesn't have a physical location, then things get a little more complicated because the process will have to be managed via mail. You'll get the payment from the buyer, mail it to the lender, and the lender will mail the car title to the new owner.
In either instance, if there's anything left over after you've paid the loan in full, you get to keep that money.
2. Private sale with negative equity
A private sale with negative equity is more complicated. Negative equity means that you owe more than the vehicle is worth. If you are upside down, you won’t receive enough money from potential buyers to pay off your loan in full.
When the value of your car isn't enough to pay the loan back, you’ll need to come up with the extra money to pay the lender. And the lender won’t give you the title to the car until you do that.
As a result, most buyers will be very wary about buying a car from you when you can't transfer title to them. If you have the extra money available immediately, you and the buyer can follow the same process as described above. You'll meet at the lender's office, provide the money to pay off the loan in full (some of which you'll have to pay out of pocket), and the lender will transfer title to the buyer.
But if you don't have the money right away, you'll have to keep making your car payments until the entire loan balance is paid off — even once you no longer own the vehicle. The lender will not provide the title for the new owner until the balance is fully repaid. Unless you know the buyer well, chances are good no buyer is going to agree to this.
3. Trade-in at a dealership
Dealerships are better equipped to handle situations where a buyer is trading in a car with an outstanding loan. When you trade in your vehicle to a dealership, they'll work with your lender to arrange a title transfer so you won't have to.
The dealership will typically start by appraising your vehicle and letting you know how much they are willing to pay for it. If you have positive equity, they'll pay off your loan balance for you, and you'll get a credit towards your new car's cost for any extra money above and beyond the amount required to repay your balance.
If you have negative equity, you may be able to take on a larger car loan to cover both your new vehicle and the outstanding balance on your existing loan. Rolling your old car loan into a new one isn't always allowed, though — it often depends on your credit and income. And it will make paying your new loan much more expensive. That said, it's an option if you have to buy a new car and are underwater on your current loan.
In some cases, dealers advertise that they’ll pay off outstanding car loan balances for people with negative equity. Be aware, though, that they usually aren't just giving you free money. They'll typically increase the amount of your loan, but just not point that out to you in the loan paperwork.
The upside of working with a dealership is that they can manage the process of getting title to the vehicle. They can also help you take steps such as registering the car with the Department of Motor Vehicles (DMV) and confirming you have the required minimum insurance. In fact, dealers usually require you to provide proof of insurance before leaving the lot with a new vehicle. Make sure you shop around for the best car insurance coverage before visiting a dealership.
However, the downside of selling your car to a dealer is that you may not get as much for it. Dealers typically pay less than private buyers since they have to turn around and resell the car for a profit.
4. Trade-in at online car buying site
Trading in your vehicle with online car buying sites is very similar to trading it in at a dealership. The car buying company will work with the lender and get the title.
If you have positive equity, you can put any extra money towards the purchase of your new vehicle after the loan is paid in full. And if you have negative equity, you may be able to roll it into a new loan.
Or you may need to provide a cashier's check or certified check for the difference between what the car-buying site offers for the vehicle and the amount due. You'd provide this to the buyer, who would then pay the lender in full and take the title to the vehicle.
5. Pay it off before you sell
If none of these options seem attractive to you, you also have another choice — keep the car and wait to sell it until you've paid off the remaining loan balance. While this may not be the ideal solution if you're eager to buy a new vehicle and owe a lot of money on your current loan, it can have some significant advantages.
If you take this approach, you won't have to worry about any prepayment penalties that might apply if you pay off your loan early. You also won't need to worry about the complexity of a title transfer. Since you'll wait until you own the car free and clear, you'll be able to transfer the clean title to the new owner when you find a buyer.
If you've paid off your car loan in full before buying a new vehicle, you may also be able to use the proceeds from your sale (plus some extra savings, if necessary) to buy your new car without a loan. It can really pay off to save for a car instead of borrowing because you'll eliminate your monthly payment and won't owe interest on the vehicle.
You'll also have more flexibility to negotiate car prices with buyers since you won't have a loan to pay off.
Can you sell a financed car?
You can sell a financed car. However, you will have to arrange to have your loan paid in full before the new car buyer can get the car's title and officially take ownership.
If you can sell your vehicle for enough money to pay your loan off, this is easy. The money from the buyer (a private individual or dealer) can be paid immediately to the lender, which provides the car's title and facilitates the transfer of ownership.
If you are underwater and owe more than your car is worth, you may need to pay down your loan more before moving forward or pay the difference between what your car is worth and what you owe. In some cases, dealers and online car buying websites allow you to roll the outstanding balance of your existing auto loan into your new loan. However, this can make loan repayment much more expensive.
Does selling a financed car hurt your credit score?
When you sell your financed car, you will need to pay off your car loan. Doing so can hurt your credit score because a car loan is often one of few installment loans many people have on their credit record. An installment loan is a loan for a fixed amount with steady monthly payments, as opposed to a credit card with a revolving line of credit. Lenders like to see a mix of different kinds of loans, so you may no longer have that preferred mix if you pay off and close a car loan.
By obtaining a new car loan after selling your old vehicle, you can maintain different types of credit. But since this account will be a newer one, it could hurt another component of your score by lowering your average age of credit. That's because lenders prefer longer credit histories.
What's better, selling your car privately or trading it in to a dealership?
There's no one right answer to whether it's better to sell your car privately or trade it in. Trading it in can be much more convenient. It could be a solution if you are underwater on your car loan because you may be able to roll over your old loan into a new one. But chances are good you will get less money for the vehicle than if you sold it to a private party.
Ultimately, you need to consider the amount of time you want to invest in the sale, as well as your comfort level with transferring title and paying off any outstanding car loans yourself, rather than having a dealer take care of these tasks for you.
Figuring out how to sell a car with a loan can take work, but it may be worth it if you need a new vehicle. Consider all of your options and choose the approach you feel most comfortable with that will also have the best long-term impact on your finances.
If you’re shopping around for a new car and looking to save money, it’s also a good time to compare auto insurance companies to ensure you’re getting the right coverage at a good price.