When you purchase a vehicle with auto financing, the bank or credit union you secured a loan from is technically the owner of the vehicle until your loan has been paid off. But what happens when you decide to sell that financed vehicle before you’re done paying it off?
Regardless of how you choose to sell a car you have a loan on, your debt must be paid in order to transfer ownership. This means the sale process may take a little longer and require more steps, especially if you owe more than your car is worth. However, selling a vehicle with a loan doesn’t have to be complicated. If you owe a lender money for a car you’d like to sell, we recommend starting the sales process by doing the following:
- Check your credit score. This will give you a heads up on what kind of interest rates you may qualify for if you want to roll any potential negative equity into a new auto loan.
- Know your vehicle’s trade-in value. Sometimes it’s easier to work with a dealer than to sell privately when you carry a loan balance, but if you choose to work with a dealer you want to make sure they give good value for your trade-in — otherwise you may want to choose selling your car on your own. If you don’t like what you hear from one dealer, you can always shop around, hoping to get a better offer from another.
Calculating Your Payoff Amount
If you don’t know your loan payoff amount you should contact your lender to inquire, and then cross-reference that amount with your vehicle’s value. Kelley Blue Book is considered the go-to resource for establishing a vehicle’s worth, and most purchasers, including auto dealers, will reference this asset to gauge what they think is a fair purchase price. Edmunds is also popular for pricing. Once you know your automobile’s estimated value, subtract your payoff amount from the total value of the vehicle to determine how much negative equity you are likely to incur by selling.
What Happens When You Finance a Car and Want to Sell It?
If you are what’s commonly called “upside down” in your auto loan, which is when you owe more than your vehicle is worth, that does not mean you cannot sell your vehicle. In fact, if you sell to a dealer and also plan to purchase from them, they can usually roll the balance of what you owe — this is called negative equity — into the new or used vehicle you buy. However, if you do this, making larger monthly payments than what is required,will help to negate the negative equity over time.
If you choose to sell your vehicle privately, it tends to be more work and less convenient, but it’s oftentimes the best option since you will likely be able to negotiate a better purchase price with a private buyer. Note that with a private sale it’s up to you as the seller to pay off the lender, including the price difference, then you and the lender, or a representative of the lender, both sign the vehicle title and hand it over to the buyer, so that they can get an updated title and registration from their state’s department of motor vehicles.
Rolling Negative Equity Into Your Next Auto Loan
Though what happens when you sell a financed car can vary based on circumstances, you want to fully understand the consequences of any choice you make. Taking out a new auto loan with negative equity is not uncommon, but it’s important to know the risks if you choose to follow this approach.
Potential pitfalls of selling a car before your loan is paid off, saddling yourself with negative equity include:
- You extend your credit too far, lowering your credit score and decreasing future buying power.
- Take on a larger amount of debt that is harder to pay back.
- You may have to sign up for a longer loan term than you’d like to make payments manageable.
- If your vehiclegets totaled, you’ll likey only get reimbursed for the value of the car. This leaves you responsible for the remaining balance of the loan.
Your monthly payment on a new car will usually be higher if you have negative equity (the exception is if you sign up for a longer loan term to shrink the payment amount or if you buy a car that’s much less expensive). This option may not be a deal-breaker, but it’s a choice that you shouldn’t make lightly. You’ll want to tread lightly if you've already traded or sold a car with negative equity to avoid falling deeper into debt.
While everyone’s needs are different, it’s best to avoid negative equity, if you are able to do so. Getting a new car can be exciting or necessary, like if your old car dies, but it’s also a big financial undertaking and you don’t want to make a bad choice that will negatively impact your finances for years to come. Selling a vehicle with a loan and taking on more debt to do so is rarely a desirable option. However, having reliable transportation is a must for most people and it may be worth incurring the extra debt and risk to get a new car that suits your needs.
Get an Edge on Financing Your Next Vehicle Purchase
DCU, a not-for-profit credit union, offers low rates and flexible terms for auto loans. Whether you shop new or used, qualified borrowers can finance up to 130% of the purchase price or Kelley Blue Book value, whichever is less. If you don’t yet know what vehicle you want to purchase, you can provide an estimate of the loan amount you seek. Use the calculator to estimate your monthly payments.
Please note, membership is required to open a DCU Auto Loan. Visit our membership eligibility page for more information.
This article is for informational purposes only. It is not intended to serve as legal, financial, investment or tax advice or indicate that a specific DCU product or service is right for you. For specific advice about your unique circumstances, you may wish to consult a financial professional.
