Ready to sell your car but still owe money on your car loan?
You’re not stuck, and you definitely aren’t the only car owner in this boat.
Selling a vehicle with an outstanding loan is legal and happens every day – buyers and lenders expect it. The trick is in managing the sale so the debt is cleared and the new owner gets a clean title.
Whether you’re eyeing a private sale, a dealer trade-in, or interested in refinancing your current car loan to enjoy a better deal, here’s how to navigate the process without headaches or stress.
Table of Contents
What does “under finance” mean?
Let’s start with a quick recap before we get into the nitty-gritty…
Most car loans are secured, meaning the asset (usually the car) is used as collateral. A lender gives you money to purchase a vehicle with the condition that if you fail to make repayments, the lender can legally repossess your vehicle to cover their losses.
Selling a car under finance means you’re trying to sell a vehicle that still has money owing on its loan.
For example, let’s say you took out a $20,000 car loan to purchase a new set of wheels. After five years of ownership, you still owe $7,000. Once you pay off that final seven grand, you own the car outright. Until then, the vehicle is owned (in part) by the lender who provided the loan in the first place.
If your car is under finance (like the example above), odds are it’s also encumbered.
In plain English, that means it still has loan repayments due and the lender still has a legal interest in your car until those repayments are made. Legally, you can’t fully pass ownership of the vehicle to someone else until the loan is fully repaid.
FIDO SAYS: Buying a car under finance doesn’t always mean your vehicle is encumbered. For example, if you’re using an unsecured car loan, personal loan or credit card (all unsecured credit products), it won’t be considered encumbered because the lender can’t legally repossess the vehicle if you miss your repayments.
Is it legal to sell a car under finance?
Short answer: Yes.
Slightly longer answer: Yes, as long as the loan is paid out as part of the sale.
It’s perfectly legal to sell a car under finance, but there are strict conditions that must be met.
Remember, when a vehicle is financed, the lender has a registered interest until the loan is fully repaid. You can’t transfer ownership of your car to someone else (whether a private buyer or a dealership) until the loan is paid off.
You’re legally responsible for verifying whether your vehicle has a clear title (no money owed) or needs to clear finance (still has outstanding debt).
It’s also important to be transparent with potential buyers if your car is under finance. This way, you avoid any complicated legal issues, and the buyer isn’t at risk of a surprise repossession down the line – since they’ll become liable for the debt if you fail to disclose encumbered status.
Step-by-step guide to selling a financed car
Selling a car under finance involves a few essential steps, but it’s straightforward when you know what’s required. Whether you’re planning to sell to a private buyer or working with a dealership, here’s what to expect.
One: Get a payout figure from your lender
A payout figure is the amount you owe your lender to clear your car loan. This will include the remaining principal, any interest, and potential “break fees” for ending a loan early. Contacting your lender directly to request a payout letter can help set expectations for a sale price that covers the outstanding debt.
Two: Figure out your car’s market value
Knowing your car’s current market value can help you determine whether a potential sale will cover your loan payoff amount or if additional funds are needed. Search online with sites like RedBook or Carsales to see what similar models are selling for.
For example, if your payout figure is $20,000 but your car is only worth $18,000, that means you have negative equity (more on that in a second).
Three: Find a buyer and disclose finance status
Once you’ve found a buyer, you’ll need to notify them that the car is under finance and explain what steps they’ll need to take. It’s your legal responsibility to disclose the finance status of your vehicle. If a potential private buyer runs a PPSR check (a $2 online search to show if a car is under finance) and finds a hidden loan, there’s a good chance you’ll lose the sale because you weren’t transparent.
Four: Arrange for loan settlement
You’ve got a few options for paying off your outstanding loan once you agree on a price with a buyer.
- You pay off the loan before selling: The most straightforward path is to pay off the loan in full before listing the car for sale.
- You refinance your loan: You can replace your existing loan with a new one, potentially with a longer loan term and more flexibility.
- Your buyer pays off the loan: The buyer agrees to pay the remaining loan balance as part of the purchase (this may require coordination with the lender to ensure all legal boxes are ticked).
Five: Complete the sale and transfer ownership
After the lender has confirmed your loan is fully paid off, it’s time to pop some bubbles and provide your buyer with proof of purchase documents while you notify your state authority of the sale (Notice of Disposal) to confirm you no longer own the car. It’s the buyer’s responsibility to transfer the registration into their name once you’ve provided the necessary paperwork.
Can you trade in a car with finance owing?
Absolutely.
Trading in your car can be a flexible way to upgrade to something that better suits your family or downgrade to something smaller.
Be upfront with a dealer about how much you still owe. Once they know this, you’ll be able to discuss your vehicle’s trade-in value, which hopefully covers your outstanding loan amount.
Dealers handle the paperwork, arrange any payout of your existing loan, apply trade-in value, and roll any remaining balance into new financing (if you agree), which all sounds simple.
But…
Make sure the dealer confirms that the old loan is paid in full before leaving with your new car. If the dealer fails to pay out the old loan, your credit score can be significantly impacted.
It’s also worth noting that you could potentially end up with a bigger loan and higher interest payments – putting you in a worse financial position.
FIDO SAYS: Don’t just take a dealer’s word for it. There may be cases where a dealer “forgets” to pay out an old loan, leaving the seller (that’s you!) liable for repayments on a car you don’t own anymore. Always get written confirmation that the old loan is settled before you drive off in your new car.
Watch out for the negative equity trap
Negative equity happens when you owe more than your vehicle is worth.
Don’t stress if you’re in this boat — it happens, especially if you bought at the top of the market or didn’t put down a deposit.
You aren’t “stuck” with an unwanted car forever, but you’ll have to choose the path that’s right for you.
This could mean:
- Pay the difference upfront: For example, if you owe $3k more than the sale price, you’ll need to pay that difference out of pocket to clear the title.
- Rolling negative equity into a new loan: Some lenders allow you to roll negative equity into a new loan for your next car (meaning your outstanding balance is added to your new loan). Keep in mind that this increases future repayments on the new loan and can put serious strain on your finances.
Tips to avoid common pitfalls:
- Never hide finance owing: This is the fastest way to end up in an expensive and stressful dispute with your buyer.
- Get everything in writing: Prioritise payout figures and confirmation of finance release (don’t trust a dealer to do it for you!).
- Check the PPSR yourself: A few days after the sale, run your own check to make sure the lender actually removed the encumbrance.
- Watch out for fees: Payout can trigger exit costs. Check the loan contract of ask the lender to highlight these to avoid a nasty surprise.
Quick recap: How to sell a car on finance
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STEP
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ACTION
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WHY IT MATTERS
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Payout quote
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Call your lender for the final figure.
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Know exactly what you owe to the cent.
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Value check
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Research current market prices.
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See if you have equity or a shortfall.
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Disclosure
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Tell the buyer about the loan.
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Builds trust and prevents legal issues.
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Settlement
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Ensure the bank is paid directly.
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The only way to legally "release" the car.
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Confirmation
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Get a letter of car loan closure.
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Proof for your records and credit health.
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Let’s recap everything we’ve learned…
When you know your rights and responsibilities, selling a car on finance isn’t as daunting as it seems.
Knowing what you owe, disclosing finance status, planning how to clear finance and getting the paperwork right make it possible (and easy) to sell or trade your car so you can move on or upgrade to something better.
And by partnering with Fido Finance, we can help you understand your payout obligations and find the best sell-or-trade strategy for you.
Make it happen today by calling 13 FIDO (13 34 36) to speak with an award-winning expert and feel confident in your options.
