Two Men Shaking Hands Selling A Car

How To Sell A Car With A Loan: A Step-By-Step Guide

Hanna Kielar7-minute read
January 10, 2022

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Wondering how to sell a financed car? If you still owe money on your current car but want to buy another vehicle, you need to know how to sell a car with a loan. It’s likely that your lender is in possession of your title if you have a loan. If this is the case, you need to obtain the title before selling it. Lenders usually hold titles to vehicles until they’re paid off because it is the legal ownership document of the vehicle. By keeping the title, it’s easier for the lienholder to recover and sell the car if it needs to be repossessed in the event a borrower defaults on their payments.

Depending on where you live, your department of motor vehicles may use an electronic title system. This makes the transfer of ownership much simpler after you’ve paid off your auto loan. Keep in mind that it could take up to 6 weeks for you to complete this process with your lender.

Before Selling A Financed Car You Owe Money On

Selling a car you owe money on is perfectly legal, and you can sell your vehicle at any point during your loan. It may not always be a good idea to sell a vehicle before it’s paid off, so you should review your situation to determine whether you really want to move on from the loan. The following steps can help you determine if now is the right time to sell your car:

Step 1: Get Your Payoff Quote

The payoff quote includes your loan balance, interest, financing fees and any prepayment penalties you’ll owe. You can contact your lender directly to request a payoff amount, and they're required to provide an offer that's valid for 10 days.    

Step 2: Find Out How Much Your Car Is Worth

There are several appraisal methods used to determine the value of a vehicle. How much it’s worth can differ based on whether you’re trading it in to a dealer or selling it to a private party. You may not receive as much when trading your vehicle in because dealers consider the retail value, which is what they can price the vehicle at as part of their inventory. 

Finding out how much your car is worth is easy. Find your vehicle identification number (VIN) and use online tools to get an estimated range of offers to expect. To get an estimate, you’ll need to enter information such as the mileage, level of wear and tear and whether the vehicle has been in an accident. 

You may be able to get more for your vehicle due to the COVID-19 pandemic. New vehicles are more difficult to find due to the ongoing microchip shortage, and this has driven the cost of used vehicles up more than 21%. Today, dealers are more willing to make an attractive offer because they need used vehicles to sell. 

Step 3: Determine Your Equity Status

Now that you know how much it’ll cost you to pay off your loan and what your vehicle is worth, you can determine if you have positive or negative equity in your vehicle. Having positive equity makes it possible to sell it and still have money left over for a down payment on a new car, whereas with negative equity, you'd have a loan balance remaining after the sale.

For example, person A owns a vehicle worth $15,000 and their payoff amount is $10,000, while person B owes $20,000 on a vehicle that’s only worth $15,000. Person A could sell their vehicle and have $5,000 in cash remaining, or positive equity. If person B sold their vehicle, they would still owe the lender $5,000, which means they have negative equity.

If you don’t have positive equity on your vehicle, you might want to consider making more payments and selling it once your equity matches or exceeds the payoff quote.

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How To Sell A Car With A Loan To A Dealership

Selling a car with a loan to a dealership can be easier and less stressful than selling it privately. If your primary goal is to upgrade to a newer or different type of vehicle, you might want to consider selling to a dealer. You      may not get as much money for the sale, however. Before you make your decision, follow these steps:

Step 1: Consider Your Equity

Trading in a car that’s not paid off isn’t difficult because the dealer handles everything on your behalf. The dealer will obtain the payoff quote, make the payment and handle the transfer of ownership for you. If you have positive equity, you can reduce your monthly payments by using the leftover value as part of your down payment. The additional payment toward the new loan reduces the amount you borrow so you can expect a lower total cost for the loan.

Dealers do finance customers who have negative equity on their vehicles, but they may roll the remaining balance into the new loan. Not only will your monthly payments be higher, but you'll pay more in interest due to the higher principal. It’s not a good idea to trade in a vehicle with negative equity because it will cost you significantly more than it would to wait a little while. The other option is to pay off the negative equity amount before purchasing another car.

Step 2: Check Your Credit Score

You should check your credit score before taking out a new loan and compare it to what it was when you obtained your existing loan.

  • If your score improved: You may qualify for a better interest rate. The lower rate may even reduce your monthly payments if you have negative equity, depending on how much you still owe.
  • If your score declined: You’re unlikely to get a better interest rate and could end up paying more for your loan. Find out why your score changed and whether there's inaccurate information that needs to be corrected.

Step 3: Get Preapproved For A New Car Loan

When you're looking for a loan for a vehicle purchase, reach out to local banks, credit unions and online lenders to see if you qualify for preapproval. If you have one or more loan offers before you walk into a dealership, you can use it as leverage to get the best deal possible. Even if the dealer isn’t able to beat the best offer you received, you may end up with a lower interest rate and payments that make budgeting easier.

How To Privately Sell A Car With A Loan

Selling to a private buyer allows you to negotiate a better price. On the downside, you'll need to handle all the paperwork yourself and avoid getting scammed by untrustworthy people. If you’re considering a private sale, follow these steps:

Step 1: Consider Your Equity

The private sale process is drastically different depending on whether you have positive or negative equity in your vehicle. You have the option to have your buyer pay off your loan directly if you have positive equity, but this isn’t possible if you’re unable to meet the payoff amount. There’s usually more room to negotiate when dealing with a private party because they're not basing what they'll pay on trade-in vs. retail values.

Step 2: Clear The Title

When you’re negotiating with a buyer, it’s important to be clear and upfront about your loan status since this can complicate the sale. Consider the following options for clearing the vehicle title if you want to sell privately.

  • Pay off the loan early: This is the best option because many buyers don’t have the patience or desire to deal with extra steps during a private sale. You can get a title delivered in about 6 weeks once you send in the final payment.
  • Allow the buyer to pay your lender directly: After obtaining your payoff quote, you can inform your lender of the sale and then have the buyer handle everything else. It’s important to verify that the loan is paid off and the title is transferred before handing over the keys.
  • Transfer the loan to the buyer: Contact your lender to see if this is a possibility before mentioning it to the buyer.
  • Get a short-term unsecured personal loan: If you have good credit, consider getting a loan for the amount you owe and paying it off once the sale is complete.

Step 3: Plan For A Secure Transaction

It’s easy to be scammed in a private sale, so make sure you protect yourself. The best ways to make sure the transaction is secure is to use a bank as an intermediary during the exchange or use an escrow service and not sign over the car until the funds have cleared. 

Step 4: Transfer The Title To The Buyer

Once you've agreed on a price with a buyer, you need to write up a bill of sale and sign the title so they can transfer ownership of the vehicle and register it. To protect yourself against liability, you should also provide warranty documentation, maintenance records, a vehicle history report and odometer disclosure. Once you've provided these forms, it’s up to the buyer to handle everything else.

The Bottom Line: Choose How You Want To Sell And Save The Stress

If you’re looking to sell your car, make sure you’re not creating more trouble for yourself than it’s worth. You can sell a vehicle with a loan at any time, but it's important to choose the right time. If you have positive equity and your credit score has improved since you took out the loan, qualifying for a new loan should be relatively easy.

Getting an instant cash offer from a reputable source can make selling your car much simpler because you don’t need to hunt for buyers or face intense negotiations. To get an instant cash offer from Rocket AutoSM, just enter your VIN and answer a few questions about your vehicle.

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Hanna Kielar

Hanna Kielar is a Section Editor for Rocket Auto℠, RocketHQ℠, and Rocket Loans® with a focus on personal finance, automotive, and personal loans. She has a B.A. in Professional Writing from Michigan State University.