How to Sell a Car With a Loan: A Step-by-Step Guide

Fact checked by Betsy Petrick

You can sell your car if you have an outstanding balance on an auto loan, but you’ll need to pay off the loan before the sale is completed. Here are the steps to take if you’re planning to sell.

Key Takeaways

• You can sell your car if you still have an outstanding loan balance on it, but you may not get enough money to pay back the loan in full. That depends on whether you have positive or negative equity in the car.
• Talk to your lender about your plans to sell your car and request the necessary documents.
• Research the market value of your car and set a competitive, realistic price.
• Advertise the car, be transparent about the loan, and expect to negotiate with potential buyers.

Assess Your Loan Situation

Depending on how long you’ve owned your car, the terms of your auto loan, and other factors, you may owe more or less money on the loan than you’re likely to get by selling. When your car’s market value is greater than the balance of your loan, you have positive equity. If its market value is less than your loan balance, you have negative equity.

If you have positive equity in the car, you’ll get to keep whatever is left over after paying off your loan. If you have negative equity in the car, you will have to make up the difference out of other funds.

Be aware that some lenders may charge prepayment penalties if you pay off your loan ahead of schedule. To avoid any unpleasant surprises, ask your lender or check your loan agreement to see if you will be responsible for any extra fees when you pay off your loan.

Important

In some cases, you may owe more on the car than it is worth. It is common for cars to lose approximately 60% of their purchase price within five years.

Communicate With Your Lender

You will need to tell your lender about your intentions to sell the car. Your lender will provide you with a payoff statement, showing how much money is required to pay the loan in full. Note that this statement will have a “good-through” date. After that date, the payoff amount will change due to accruing interest.

Your lender is likely holding your car’s title. You will need to pay off your loan before the lender will transfer the title to the new buyer. It can take two to six weeks to receive an updated car title from the state after a loan is paid in full.

If you find a buyer who is willing to take over your loan in their name, your lender may agree to transfer the loan. Keep in mind that the buyer will need to qualify for the loan based on their own credit.

Prepare the Car for Sale

Once you have talked to your lender, you can begin the process of preparing your car for sale.

Clean the Car

Cleaning your car inside and out helps improve its sale appeal. If you don’t have all of the necessary supplies at home, you can schedule a professional cleaning or detailing.

Gather the Necessary Documents

It is important to have all of the necessary documents ready to ensure the sales process goes smoothly. Those documents can include:

• State emissions inspection certificate
• Maintenance records
• Warranty documents

The vehicle title is also a vital part of completing the sale, but, as mentioned, you will most likely need to pay off your loan before your lender releases the title to you.

Schedule a Pre-Purchase Inspection

A pre-purchase inspection conducted by a trustworthy mechanic can be a useful way to build prospective buyers’ confidence in condition of the car. Some buyers may want to arrange for their own inspection.

Determine the Selling Price

You will need to set a sale price for your vehicle. Factors that impact your car’s value include:

• Age
• Mileage
• Condition
• Color
• Accident history
• Your location

There are a variety of online resources you can use to help determine your car’s market value, including:

• Kelley Blue Book
• The National Automobile Dealers Association (NADA)
• Edmunds

Advertise the Car

After you have determined a competitive price that aligns with the car’s market value, you can begin advertising the sale. You can advertise via:

• Online platforms, such as Autotrader or Cars.com
• Social media platforms, such as Facebook Marketplace
• Local newspapers
• Word of mouth

However you decide to advertise, it is important to create an attractive listing that offers plenty of information about the vehicle and, where possible, high-quality photos. Being transparent about the existence of the loan in the listing will ensure that potential buyers aren’t surprised by the situation or put off by it.

Negotiate With Potential Buyers

Some negotiation is usually part of the car sale process. You can screen potential buyers on the phone before moving forward. If a buyer wants to see the vehicle, it’s best to arrange to meet at a public place, such as a nearby mall or police station. If they want to take it for a test drive, consider bringing a companion and accompanying the potential driver.

Be prepared for counteroffers. Consider how much you are willing to come down on your price, if at all. If a buyer is not willing to meet your price expectations, you can move on to someone else.

Pay Off the Loan and Complete the Sale

As a final step, you’ll need to pay off the loan, so ask your lender how it prefers that be handled. If you complete the sale of the car at the lender’s office, as is often the case, you can remove the lien from the title and transfer ownership of the vehicle right there. The lender may need to sign an affidavit that shows it is aware of the ownership transfer.

Either you or the buyer can make the payment to close the loan. If the purchase price doesn’t cover your outstanding loan balance, the buyer can pay the lender whatever they have agreed to pay for the car and you can make up the rest. Otherwise the buyer can pay you, and you can pay the lender and pocket any difference.

In addition, you will most likely need to provide the buyer with a bill of sale, which serves as legal proof that the vehicle belongs to the new owner. Not all states require a bill of sale, but it serves as an important record of the transaction. Keep your own records of the sale to prevent any misunderstandings with the buyer, and be sure to follow up with your lender to confirm that your loan is paid in full.

Can I Trade in a Car I Owe Money On?

You can trade in a car that you still owe money on, but you will need to determine your equity position. If you have negative equity, the amount you owe could roll over into your new car loan.

If you have positive equity, you can use that money to help pay for the new car.

Does Selling a Financed Car Hurt Your Credit?

Paying off your car loan could have a small negative impact on your credit score. That’s because credit scores favor people with a good “credit mix” (such as credit cards, mortgages, and auto loans). However, your credit mix only accounts for 10% of your score, so it isn’t a major factor.

Can You Transfer the Title of a Financed Car?

If you have a loan on your car, you will most likely need to pay it off in full before transferring the title to a new owner. The lender may also need to sign an affidavit attesting that it is aware of the change in ownership.

Can You Transfer a Car Loan to Another Person?

It is possible to transfer a car loan to another person in some situations. If the lender allows for such transfers, the new loan holder will still need to qualify for the car loan based on their own credit.

Are There Tax Consequences for Selling a Car With a Loan?

If you sell the vehicle for more than you paid for it (a fairly rare occurrence, since most cars depreciate in value), you should report that profit as a capital gain on your taxes.

The Bottom Line

You can sell a car with a loan, but it involves a few extra steps. You will need to work with your lender and find a buyer who is willing to go through those extra steps with you. If you want to keep the car but can’t afford the loan payments, talk to your lender about the possibility of refinancing.

Read the original article on Investopedia.