How to sell a car that is not paid off

You've sold your car to someone else. The paperwork has been submitted to the registration authority and the new owner has happily driven off into the sunset, behind the wheel of his or her new purchase.

But have you forgotten about your finance agreement?

If you don't pay out the secured loan for the car after selling it, that could be inconvenient at the very least. To say nothing of how it might affect the vehicle buyer.

The car you've sold is actually 'owned' in part by the bank or finance company (the lender) that helped you buy the car in the first place. If you're in financial trouble (which might be why you're selling the car now) you're not actually transferring the debt to the new owner of the vehicle when you sell it. And in many cases, loan agreements prohibit the borrower from selling the vehicle without making arrangements to pay out the loan first.

In the event the lender stops receiving money to repay the loan amount, it will come after you sooner or later, no matter who is in possession of the vehicle. It's your signature on the bottom of the loan contract.

Cars purchased with the help of a secured loan are collateral for that loan. What is collateral exactly? It's like a fancy financial word for leverage. If you don't pay the lender on a regular, on-going basis, the lender may be able to repossess the car(even from the new owner) and sell it to pay your debt.

That's not the end of it though. You may avoid the ugly, confrontational scene in the driveway when the tilt-tray truck repossesses the car – something the new owner will have to explain to his or her tut-tutting neighbours.

And if somehow the new owner doesn't come gunning for you, the finance company will. You will receive increasingly assertive phone calls from debt collectors, and even if you pay up there'll be a nasty mark on your credit record, one which will likely follow you around for years... Whenever you apply for a new credit card or a mortgage to buy a home.

Aside from the blot on your credit record, the lender may also pursue you through the courts for any money outstanding AFTER the car has been sold.

So there are some solid reasons for selling the car unencumbered (free of any financial interests held by lending institutions). Like elephants, finance companies have long memories. The best advice is this: Don't startle them, and back away from any confrontation… Lest you be trampled underfoot.

According to Stratton Finance, roughly half the privately-sold cars purchased by Stratton customers are encumbered prior to acquisition by the new owner. The property purchased (including cars, bikes, boats, commercial equipment) can be subject to repossession by the finance company if the vendor (the person selling the vehicle) doesn't pay out the loan or at least make on-going payments.

Rob Jones, Stratton's Chief Operating Officer, says that his company's customers use an automated direct-debit payment system, so the customers can't stop payments without the company's approval. Even if the vendor sells the car, the payments would continue to be debited from the vendor's savings account or pre-tax pay, until such time as the loan is repaid in full.

There is at least some consumer protection available for the new owner of the vehicle, in the form of the Personal Property Security Register (PPSR) or carsales.com.au service, CarFacts. Both are online tools for buyers to establish whether the car for sale is encumbered or stolen.

"If you sell your car and it's under finance still, basically the PPSR still sits over that asset, with your lender," says Jones.

"Now, even if you sell it, the payments will continue to come out on that loan, because as far as the lender is concerned, you're still driving around in that vehicle – and owning that vehicle."

Stratton customers may be safe from pursuit by the lender, but the problem then is they're paying off a loan for a car they no longer own.

"That's where basically it's incumbent on the vendor to pay out that finance," Jones continues.

"I would say that the majority of the time most people are switched-on enough to run a PPSR check and see if there is an encumbrance [on the vehicle], at which point, when the purchaser's paying for the car, there are two ways that they can do it..."

One way is for buyers to pay the full amount to the vendor and trust that the vendor will pay out the finance company.

"Personally, I don't think that's the best approach to take," Jones says.

The preferred way involves the purchaser paying out the vendor's finance company first, and then paying the balance of the negotiated price of the car to the vendor. If, however, the buyer is also financing the purchase of the car, the buyer's finance company could pay out the original loan on behalf of the buyer, with the balance of the new loan and any cash component from the buyer going to the vendor directly.

"What should normally happen is a payout letter is generated; the purchaser will [say]: 'All right, I'll pay $20,000 to [the lender], I'll pay the balance to yourself and know that there's no more finance owing on that vehicle'."

Jones says that despite the existence of the PPSR and CarFacts, buyers still enter into contracts for the purchase of a vehicle without being aware of a third party's financial stake in the vehicle.

"It's definitely still a problem," Jones says, suggesting some buyers can be "naïve" or "just unaware of the process itself".

Checklist for selling an encumbered vehicle:
1.Contact lender and ask for payout figure,
2. Factor this figure in to the final negotiated price for the vehicle being sold,
3. Once the sale of the vehicle has been agreed, ask lender for a 'payout letter',
4. Supply copy of letter to buyer with instructions explaining how to pay out lender,
5. Confirm with lender that loan balance has been repaid,
6. Buyer pays balance of purchase price by bank cheque, cash or Pay Protect,
7. Vendor hands over keys of the car to the buyer

DISCLAIMER: The information contained in this document is general in nature and should not be relied upon as legal advice. carsales does not warrant the accuracy or completeness of any representations made in the document or that the material is suitable for any purpose. You are responsible for assessing the material and seeking your own legal or financial advice. To the fullest extent permitted by law, carsales excludes all liability for loss or damage (including indirect or consequential loss or damage) which may be incurred in connection with your use of or reliance on the material contained in this document.