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A few years ago, you financed a new car 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 to draw 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 a few 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 balance of the loan. With help from credit institutions and dealerships, as well as the State Motor Vehicle Administration (DMV), your options include some of the following:
- Pay off the remaining credit
- Sell your vehicle to a used car dealer
- 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 a car on loan. Here are a few tips that might help:
1. Gather information about your loan
First, contact your lender and find out the amount you can withdraw on your loan. This may be slightly higher than the current balance shown on your monthly statement due to interest, early repayment penalties or other fees.
As long as you owe money on the car loan, the lender has title and effectively owns the vehicle, which will be used as collateral in the event of a default. You must meet the payout amount before the lender transfers ownership to you.
Your lender can also help you understand the steps you need to take to pay off your loan and sell your car, whichever way you choose to do it.
2. Know what your car is worth
Next, you need to research the current value of your vehicle. With the overall supply chain issues stemming from the Covid-19 pandemic, the industry is suffering from a shortage of new cars – meaning the market for both new and used cars is hot.
You can easily find out your car’s cash value by visiting a vehicle review site such as Edmunds, Kelley Blue Book, or Cars.com. You will need to know the year, make, model, your zip code and the overall condition of the vehicle. Vehicles under three years old have a higher value, but vehicles up to five years old are also in demand.
3. Consider your car’s equity
Equity is the difference between what you owe on your loan and what your car is worth. If your car’s value is greater than your loan repayment amount, your car has positive equity. If you owe more than your car is worth, your car will have negative equity — also known as “upside down” on a loan.
For example, if your vehicle is worth $20,000 and your car loan payoff is $25,000, your credit is upside down because you still owe $5,000
4. Prepare for the transaction
Whether you have negative or positive equity, the transaction to sell your car typically involves you, the buyer, and the loan officer who completes the transaction and transfers title to the car to the buyer. Before this meeting, be sure to check with your lender exactly what you and the seller need to provide – e.g. B. Documents and money for the sale – to make the transaction as smooth as possible.
The buyer then takes the signed title and other relevant documentation to their local DMV to obtain a new registration and title for the vehicle.
How a private sale will affect your loan
Before the pandemic, a private sale typically fetched the best price for a used car. But going this route also means that you and the buyer have to do the administrative heavy lifting on your own. This is why it is so important to get the current withdrawal amount, the documents required by the lender, and how the lender intends to process the transaction.
Keep in mind that the lender must receive the full disbursement amount before the loan officer can transfer title to the buyer. If you have positive equity on the vehicle, the lender will write you a check for the difference. If you have negative equity, you must pay the lender the difference out of pocket before the agent transfers title to your buyer.
Exchange of a car with an existing loan
A dealer trade-in is a relatively easy transaction compared to a private sale. If your trade-in vehicle is worth more than the loan repayment amount, the difference will be applied to the price of the new vehicle. If your repayment amount is more than the value of the traded vehicle, the dealer will add the difference to your new car loan.
Alternatives to selling a car
If you’re unsure if selling your car is right for you, there are a few 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 the outcome of this transaction to be smooth for both you as their customer and themselves as the lienholder of the vehicle. Your lender can help you get your payout amount, navigate the steps to selling to a private party, or view the interest rate you qualify for if you decide to trade in a new or used vehicle.
Refinance your loan
When you first speak to your lender, you may decide that your best course of action is to keep your current vehicle and refinance your loan rather than selling the car. Depending on your credit rating, refinancing may get you a lower interest rate, which can save you money on your monthly payments and potentially help you pay off your loan faster.
Or you may choose to extend your repayment period to receive a lower monthly payment. Just remember that with a longer term, you pay more interest over the life of the loan.
Tap on your savings
If you have a sizable savings account and don’t want to take on any more debt, consider using your extra money to pay off your car loan. However, make sure that after paying off your car loan you have enough savings to cover any unexpected expenses.
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