You can sell a car even if you still have a loan on it, but there will be a few extra steps to the process.
“When there’s a loan on the car it means your lender owns it and holds the title,” says Grant Feek, managing director of the private seller exchange for Cox Automotive. “You must be the owner of record in order to sell the car, which means paying off the loan and getting the title transferred to you.”
To do this, you’ll need to know your vehicle’s value and loan payoff amount. You can then use your car’s current market value to determine how much equity you have, and you’ll also need to decide whether you’d be better off selling to a dealer or a private party.
Here are the steps to selling a car with a loan.
Step One: Know What Your Car Is Worth
“Whenever you’re preparing to sell a vehicle, it’s a good idea to start by getting a realistic estimate of what your car is worth based on its condition, mileage and conditions in your local market,” says Matt Dundas, senior director of finance with Carvana.
There are many online resources that can help you do this, such as Kelley Blue Book and Edmunds. To get an estimate of your car’s value, you’ll need to provide information about your car, such as the make, model, year, mileage and general condition, as well as your ZIP code to get price estimates for your area. Sites may also ask for your vehicle identification number to give a more accurate estimate.
It can also be helpful to search sites where other people are selling their used cars to see listings for vehicles like yours, Feek says. “Keep in mind that just because they’re listed for a certain price doesn’t mean they’ll sell for that, but it’s a good way to get an idea of the average pricing in the market.”
Step Two: Learn Your Payoff Amount
Your payoff amount is how much it’ll take to pay off your loan along with any interest and fees. You should contact your lender to get a 10-day payoff statement, which is a document giving your payoff amount plus 10 days’ worth of interest.
Most lenders will let you download a statement from their website, or you can call to request one be sent to you via mail, Dundas says. Carvana requests a copy of this document if you want to sell a car with a lien to help finalize your trade-in or sale, according to Dundas.
It can be a good idea to give yourself a little breathing room in the payoff schedule, and you can achieve this by calling your lender. “By speaking to a live person, you can customize your payoff request, such as a 15- to 30-day payoff,” says Steven Gordon Sr., senior director of finance and partnerships at Way.com. “Ask the supervisor what the protocol is with the lender to cancel the extended warranty and gap coverage in order to get the remaining amount of the original price for those refunded back to your lender, which eventually goes back to you.”
Gordon says to take note of the person who gave you the payoff quote, as well as if you can pay the loan off electronically. “The faster that you can pay off the lender, the faster you get the title, and the faster you will have your money,” he says.
Step Three: Determine Your Equity
With your car’s value and your payoff amount in hand, you can determine your current equity.
“Equity represents how much value is left over after paying off the loan and can be calculated by subtracting your payoff quote from your vehicle’s value,” Dundas says.
You can sell a car with positive or negative equity, but the process will look a little different.
Selling With Positive Equity
If you have positive equity, your car is worth more than the payoff amount. In this case, there are two ways to sell a car with a loan, Gordon says. One method is to have the buyer give you two checks: one to pay off the loan balance to the lender and one for the remaining equity in the car.
Alternatively, the buyer could give the lender a check for the full value of the car. Then your lender will send you a check for the funds that exceed the loan balance, Gordon says.
Selling With Negative Equity
If you have negative equity in your car, called being upside down, you owe more than the vehicle’s current market value. As a result, “you’ll need to come up with cash when you sell your vehicle to cover the extra amount due to the lender or try to roll the extra amount owed into the loan on your next car if you’re trading in,” Dundas says.
Rolling your existing balance into a new loan will leave you with a bigger, more expensive loan, as you’ll be borrowing more than the price of your new car. If you choose to do this, the Consumer Financial Protection Bureau advises that you make sure you know who to contact at your current lender to determine when your old loan has been paid off.
Step Four: Sell to a Private Party or Dealer
You can choose to sell your car to a private party or a dealer. Working with a dealer is the easier option, but you may get a better price if you sell to a private party.
Selling to a Dealer
When you trade in a car with a loan, the dealer can handle the payoff process on their end. The dealer will appraise the car, call the lender and get a payoff amount, Gordon says.
“If there is equity, you can use all, some or none of the equity as a down payment on the vehicle you are buying,” he says. “Typically, the equity is applied to the out-the-door price and an unpaid balance is due.”
In negative equity situations, the dealer can help you roll in your outstanding loan balance to your new car loan.
A dealer may also help you save sales tax on your next purchase. “In many states, the value of your trade-in can be subtracted from the price of your next car when calculating sales taxes due, which can add up to hundreds or thousands of dollars in savings,” Dundas says.
Selling to a Private Party
It’s possible you’ll make more money if you sell privately, but the process can be more complicated for you.
You’ll need to handle the payoff process yourself ahead of time, which takes at least a few days and often much longer. “And unless the seller is someone who already knows (and) trusts you, they’re not likely to want to pay for the car when you don’t have the title to prove you’re the owner, and you both might have to wait for weeks to get the title once the car is paid off,” Feek says.
Step Five: Don’t Forget Taxes
Before you sell a car with a loan, make sure you’re aware of the tax implications of any sales strategy so you don’t get hit with a costly surprise.
“Depending on how your loan was set up, you may have paid taxes upfront, or more likely they’ve been rolled into your monthly payment,” Feek says. “You’ll want to confirm with your lender and your state’s (Department of Motor Vehicles) whether you’ll owe any taxes once the car is titled in your name.”
If you learn that you will owe taxes, you can ask if there’s “a grace period during which you can avoid paying taxes if the car is transferred to a new buyer within a certain time frame,” he says
The key to selling a car when you still have a loan is to do your homework beforehand. “Always be careful (and) ask a lot of questions,” Gordon says.