As the average new car price tag grows each year, auto loans are being stretched to record levels. This trend puts borrowers in a risky situation should they have to sell the vehicle before the loan is paid off. Many shoppers buy vehicles they can't afford and take out auto loans for much longer than the recommended 36-month term, only to discover that the vehicle no longer works for them. Others have an unexpected change in income and are no longer able to afford the monthly payments. Selling a car that you still owe money on can be complex and costly if you're unprepared. We cover the costs involved and the steps to take if you're forced to sell your financed vehicle.
Costs of Selling a Vehicle you Still Owe Money On
The costs of having to sell a vehicle before it's paid off include the time, hassle, and financial burden of getting the remainder of the car loan squared away. Before you pay off your vehicle in full, your lender will hold the title which you'll need to obtain in order to sell the vehicle. The process of selling a car that's not paid off will look different depending on whether you're selling to a private party or a dealership and also whether you're upside down on the loan or have positive equity.
The Payoff Amount
Before selling the vehicle, you will need to determine the payoff amount that you will need to pay the lender to obtain the vehicle's title. The payoff amount is the total amount you still owe on the loan. According to Lendingtree, this includes the interest and any prepayment penalties the lender may charge.
Hassle of a Private Sale
It is easier to sell a vehicle that you still owe money on to a dealership than to a private party, but you likely won't get as much money for it. Although a private sale may yield a higher payout, it will also take more time and will likely cause more headaches. Selling the vehicle privately requires having a clear car title which means obtaining the car title from the lender. To get the title, you'll need to cover the remainder of the loan outright. Many sellers aren't able to cover this payoff amount without the buyer's money in hand, while most buyers are hesitant to proceed when the seller doesn't own the title.
Costs of Selling to a Dealership
Selling or trading in at the dealership will be more straightforward and will take less time. Dealers handle these types of transactions often and will be able to guide you through the process. Unfortunately, you won't make as much on the sale as you would going the private route, and trading in a car with negative equity can spiral into a dangerous cycle of debt.
Negative vs. Positive Equity
To find out if you have positive or negative equity in your vehicle, simply subtract the payoff amount from the current value of your vehicle. If your vehicle is worth more than you still owe on it, you have positive equity. If you owe more than its current value, you have negative equity, otherwise known as being 'upside down'. Selling a vehicle with negative equity can be costly in both the short and long term. If you're upside down on the loan, the dealership may offer to roll your current debt into a new car loan. While this sounds good in theory, it will only put more pressure on your finances.
Tips for Selling a Vehicle That's Not Paid Off
Although selling a vehicle you still owe money on can be a challenge, there are steps you can take to make the transaction as smooth as possible. First, contact your lender right away and explain the situation. Ask them to walk you through the process of obtaining and transferring the title and find out the typical processing time and prepayment penalties. You should also ask for the total payoff amount and request an official payoff letter.
According to The Balance, a payoff letter "states the payoff amount, a date by which the amount is still accurate, and instructions for completing the payment, including acceptable forms of payment or where to wire the money." This will prevent any surprises about how much you owe.
With a negative equity auto loan, the best course of action is to postpone the sale and pay down the debt as much as possible until you're no longer upside down. If this is not an option, you can consider taking out an unsecured loan to cover the difference and obtain the title from the lender. Once you sell the vehicle, you can use the funds to pay back the loan. The drawback is that unsecured loans usually come with high-interest rates and an excellent credit score is required.
If you recently bought a vehicle and realized you can't make the payments, it's a good idea to reach out to your dealership and see if you can trade-in for a less expensive model. Because dealerships want to retain their customers they may be willing to make the transaction, but you'll still need to cover the difference if you're upside down on the loan.