How to sell a car with an existing loan – Forbes Advisor

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You financed a new car a few years ago with a five-year loan. But your needs have changed and you’ve decided to sell your vehicle, even though you still have time to pay off the loan.

Selling a car with an existing loan is common practice; and with an ecosystem of industry professionals you can call on, you can get the help you need to navigate the process smoothly.

Can you sell a car with an existing loan?

Yes, there are several ways to sell a car with an existing loan. Keep in mind that if the selling price is less than your loan balance, you will have to pay the remaining balance on the loan. With help from lending institutions and dealerships, as well as the state’s Department of Motor Vehicles (DMV), your options include some of the following:

  • Repay the remaining loan
  • Sell ​​your vehicle to a used car dealership
  • Sell ​​the vehicle in a private transaction
  • Trade in the vehicle at a new car dealership

4 tips for selling a car with an existing loan

It may seem daunting, but a little prep work can simplify the process of selling your car with a loan. Here are some tips that might help:

1. Collect information about your loan

First contact your lender and find out your loan repayment amount. This amount may be slightly higher than the current balance printed on your monthly statement due to interest, prepayment penalties or other charges.

As long as you owe money on the auto loan, the lender has title to and effectively owns the vehicle, which is used as collateral in the event of default. You must satisfy the repayment amount before the lender transfers title to you.

Your lender can also help you understand the steps you’ll need to take to pay off your loan and sell your car, however you choose to do so.

2. Know what your car is worth

Next, you will need to find the current value of your vehicle. With the general supply chain issues due to the Covid-19 pandemic, the industry is experiencing a shortage of new cars, which means the market is hot for both new and used vehicles.

You can easily find out the current value of your car by visiting a vehicle appraisal site like Edmunds, Kelley Blue Book or Cars.com. You will need to know the year, make, model, your zip code and the general condition of the vehicle. Vehicles less than three years old have a higher value, but even vehicles less than five years old are in demand.

3. Consider the equity in your car

Equity is the difference between what you owe on your loan and what your car is worth. If the value of your car is greater than the amount of your loan repayment, your car has a positive equity. If you owe more than your car is worth, your car has negative equity, which is also known as being “upside down” on a loan.

For example, if your vehicle is worth $20,000 and your car loan repayment is $25,000, then your loan is upside down because you still owe $5,000.

4. Prepare for the transaction

Whether you have negative or positive equity, the transaction of selling your car typically involves you, the buyer, and the loan officer, who will complete the transaction and transfer title to the car to the buyer. Before this meeting, be sure to ask your lender exactly what you and the seller will need to provide, such as documents and money for the sale, to make the transaction as smooth as possible.

The buyer will then take the signed title and other relevant documents to their local DMV to obtain a new registration and title for the vehicle.

How a private sale affects your loan

Before the pandemic, a private sale usually brought the best price for a used vehicle. But going this route also means that you and the buyer will have to do the heavy paperwork yourself. This is why it is so important to obtain the current repayment amount and required documentation from the lender, as well as to ask how the lender wishes to handle the transaction.

Remember that the lender must receive the full repayment amount before the loan officer can transfer title to the buyer. If you have positive equity in the vehicle, the lender will send you a check for the difference. If you have negative equity, you will need to give the difference to the lender before the representative transfers title to your buyer.

Trade in a car with an existing loan

A trade-in by a dealer is a relatively easy transaction compared to a sale between individuals. If your trade-in vehicle is worth more than the loan repayment amount, the difference will be credited to the price of the new vehicle. If your refund amount is greater than the value of the trade-in vehicle, the dealer will add the difference to your new vehicle loan.

Alternatives to selling your car

If you’re not sure whether selling your car is the right choice for you, there are other options to consider.

Talk to your lender

Your lender holds title to your vehicle, so they should be your first point of contact. They want to see the outcome of this transaction go smoothly for you as the customer, as well as for themselves as the lien holder on the vehicle. Your lender can help you get your refund amount, walk through the steps to sell privately, or see the interest rate you‘re eligible for if you decide to trade in a new or used vehicle.

Refinance your loan

By talking to your lender first, you might decide that the best thing to do is to keep your current vehicle and refinance your loan instead of selling the car. Depending on your credit, refinancing may get you a lower interest rate, which could save you money on your monthly payments and potentially help you pay off your loan faster.

Or you can choose to extend your repayment term to get a smaller monthly payment. Remember that if you choose a longer term, you will pay more interest during the term of the loan.

Dip into your savings

If you have a large savings account and want to avoid further debt, you might consider paying off your car loan with your extra cash. However, make sure you have enough emergency savings after paying off your car loan to cover any unexpected expenses.

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