So, you want a new car but still owe money on your current one. Not a problem. You can sell your car with an existing loan by paying off the lender who holds the title.
Since the lender technically owns the car until the loan is paid in full, you'll need to settle the balance before you can transfer the title to a new owner. This may involve some extra steps to pay off your lender and sell your car. Here are the steps to sell a car with a loan balance.
1. Determine Your Car's Value
Before listing your car for sale or heading to the dealership, you'll want to know what it's worth. Free car appraisal tools at sites like Kelley Blue Book or Edmunds can help you estimate how much you might get if you sell the car yourself or trade it in at a dealership. You may see different valuations based on your car's condition, upgrades, service history and whether you're selling the car to a private party or trading it in at a dealership. These valuations can serve as a starting point for negotiations.
You might consider getting a purchase offer from a used car dealer like CarMax or another local dealership. Their offer can give you a baseline price which you might beat by selling your car privately. If you can't sell the car on your own, you can always fall back on the dealer's offer.
2. Contact Your Lender
Once you have a good idea of your car's value, contact your lender to find out your loan payoff amount, which could differ from your loan's remaining balance. Check your loan documents or ask your lender if your loan includes a prepayment penalty.
While you're at it, ask your lender about their requirements for you to sell the car. For example, if your lender is a local bank or credit union, they may want you and the buyer to meet at their branch office to sign the papers. If you're trading in your financed car to a dealership, the lender and dealer can handle the transaction directly.
3. Calculate Your Car's Equity
Now you know your car's value and the amount it will take to own it outright so you can complete the sale. Subtract your vehicle's payoff amount from its current value to determine whether you have positive or negative equity. The answer will determine whether you'll pocket money after the sale or need to pay the difference to pay off your auto loan.
- Positive equity: Let's say your car is worth $25,000, and your payoff amount is $20,000. In this case, you owe less than the car is worth, so you could walk away with $5,000 in positive equity if a buyer agrees to the full sale price.
- Negative equity: You have negative equity in your car if you owe more than it's worth. This scenario is also known as being upside-down or underwater on your loan. For example, if your car is worth $25,000 but you owe $30,000, then you would need to come up with an additional $5,000 to pay off your loan if you sell the car for $25,000.
In either case, only when the lender is paid off will they release the title so you can transfer ownership to the buyer.
4. List Your Car
Once you've calculated a competitive price, it's time to list your car for sale on online marketplaces like Autotrader or Cars.com or on social media platforms like Facebook Marketplace. Be sure to include high-quality pictures of the car's exterior and interior, along with a list of your car's features and specifications. Remember that under federal law, you must provide the vehicle's mileage using either the car title or a disclosure form from your state's department of motor vehicles (DMV).
When speaking with potential buyers, mention that the car has an existing loan and clarify if they'll need to accompany you to the bank to sign the paperwork.
You can forego listing your car if you plan on trading it in at a dealership. The dealer will appraise your car and make an offer, which you can accept, decline or negotiate.
5. Finalize the Price
Negotiation is perhaps the least enjoyable part of selling your car, but it's usually necessary to get a fair price. Before meeting with a buyer or dealer, consider your ideal price and be ready to support it with documentation such as maintenance records and a motor vehicle history report. Also, if you have a transferable warranty, bring the warranty details to share with the buyer.
Potential buyers will likely make a counteroffer, so it's a good idea to have a baseline price in mind. If their offer falls short, you can walk away from the deal and work with other buyers.
Keep in mind, dealers are negotiating based on the trade-in value of your car. Dealer offers tend to be substantially less than private-party offers because the dealer must make a profit when they resell the vehicle.
Learn more >> How to Sell Your Car for the Most Money Possible
6. Pay Off the Loan
Once you agree to a final sale price with a buyer or dealer, all that's left to do is pay off your loan to release the title and complete the sale. Depending on how you sell your car, the process could look a bit different:
- Private buyer with positive equity: If your car is worth more than you owe, you can use the buyer's payment to pay off your loan, and any leftover money is yours to keep. With the loan paid off, your lender should release the title to you, which you can then sign over to the buyer.
- Private buyer with negative equity: If you're upside-down on your auto loan, you'll need to come up with the difference between the loan payoff amount and the sale price. Use the buyer's payment to pay off as much of the loan as possible and cover the remaining amount with your own funds.
- Dealership trade-in: In this case, the dealership typically works directly with your lender to pay off the loan. Generally, the dealer applies the value of your car toward your new purchase. If you owe more than the car's value, the dealer may offer to roll the remaining loan balance into your new car loan. While this is a convenient option, be aware it's a costly one that raises the total loan amount and consequently your monthly payments.
Frequently Asked Questions
By itself, selling a car with an attached loan shouldn't hurt your credit as long as the loan debt is repaid as agreed.
However, paying off the loan could impact your credit in other ways. For example, managing a variety of credit types, such as installment loans and credit lines, accounts for 10% of your FICO® Score☉ , the credit score used by 90% of top lenders. As such, losing a car loan from your credit mix may lower your credit score, but the dip is usually small and temporary.
What matters most is making your monthly car payments on time, since your payment history makes up 35% of your FICO® Score. Once you sell your car, it's critical to pay off your loan as agreed to avoid negative marks on your credit report, which could significantly damage your score.
No, you can't transfer the title of a car without first paying off the debt. When you finance a car, the lender places a lien on it to help protect their investment. You must pay off the loan for the lender to release the lien so you can transfer the car's title to its new owner.
There are generally two ways to transfer the car's title, depending on who is buying your car.
- Private party buyer: Talk to your lender about how they prefer to handle loan payoffs and title transfers. It's not uncommon to pay off your loan at the bank or credit union holding your loan so you can receive the car title immediately and sign it over to the buyer.
- Dealership trade-in: If you trade in or sell your car at a dealership, the dealer typically works directly with your lender to pay off your loan and receive the car title.
It is possible to get out of a car loan without hurting your credit as long as the loan is paid off as agreed. If the amount you owe is less than or close to the car's value, your best bet is likely to sell the car and use the proceeds to pay off the loan. However, if you sell the car for less than the payoff amount, you'll need to cover the difference to settle the debt. Ideally, you can repay the remaining balance upfront. But if not, your lender may allow you to refinance the remaining balance with smaller payments.
Another option is to allow someone to take over your car payments if your lender allows it. In this scenario, another person agrees to take ownership of your car and assume the monthly loan payments. Generally, the new owner must qualify for the loan to get approved and take over the payments.
If your monthly payments are more than you can comfortably afford, you may be able to refinance your auto loan to lower your costs enough to keep your car. With good credit, you might qualify for lower interest rates than you're currently paying and reduce your payments. Opening a new account could lead to a temporary dip in your credit score, but your scores should rebound once you're making regular, on-time payments on the new car loan.
Improve Your Credit Before Applying for a New Car Loan
You can sell or trade in your car even if you're still paying on a loan, but check your loan agreement or talk with your lender beforehand. You'll want to verify how they handle title transfers and if there is an early payment penalty.
If you plan on financing a new car after selling your current one, it's a good idea to check your credit report and score for free with Experian. You'll see what lenders see when reviewing your credit and making a loan approval decision. If your score could be better, take steps to improve your credit before applying for a new loan. With a higher score, you might qualify for a lower rate and save money over the course of the loan.