How to Sell a Car When You Still Have a Loan

If you’re still making payments on your car but are ready to sell it, you may be wondering how to sell a car with a loan. In short, you have to pay off the loan so the lender will release the title and ownership can be transferred to the new owner, whether that’s a private buyer or a dealer taking the car as a trade-in. In any case, negotiation is critical to getting the best price for your used car so you can at least come close to paying off the loan.

Steps to selling a car with a loan

Whether you’re selling the car to a private party, trading it in or selling to a dealer outright, there are some things you need to know and a few steps you should follow when selling a car that has a loan.

1. Determine what your car is worth 

First, determine how much your car is worth in the market today using a vehicle valuation site such as Kelley Blue Book or Edmunds. Other used-car buyers, including Carvana and CarMax, will also give you a valuation for your vehicle. The sites will ask for basic information about your car: the year, make, model, overall condition and the ZIP code in which you reside. Some sites will also ask for the license plate or vehicle identification number (VIN) in order to generate a value. Be honest when you assess the condition. You may have come to overlook your car’s flaws, like a rip in the seat or a small dent in the fender, but the buyer will see those problems and may value the car lower than you expect.

The way you plan to sell the car will influence how much money you make on the sale. For instance, you’re likely to get more for your car if you sell it to a private party than if you trade it in to a dealer.

2. Determine your payoff amount

Ask your lender for a payoff amount, which is likely to be different from your current loan balance. The payoff amount includes the balance of the loan, interest up to a specific date and any fees. Payoff amounts are typically valid for 10 days, depending on the lender. You should be able to get the payoff information through your lender’s website or by calling to request it. Be sure to review the Truth in Lending Act disclosure on your loan contract or ask your lender if your auto loan has a prepayment penalty before you pay off the loan.

3. Understand your equity

Once you know the value of your car and the payoff amount, you can understand your equity in the car. It’s the difference between the value of the car and the payoff amount. There are two options: positive or negative equity.

• Positive equity: This means your car is worth more than the payoff amount. If your car is valued at $15,000 and the loan balance is $13,000, you have $2,000 in positive equity.
• Negative equity: This means your car is worth less than the payoff amount. It’s also often called being upside-down or underwater on your car. If you owe $15,000 on the loan but the car is only valued at $13,000, you’ll have to come up with an additional $2,000 to pay off the loan.

4. Discuss the sale with your lender

Before listing your car for sale, it’s smart to consult with your lender. You’ll want to understand the equity position of your car and their payoff requirements to complete the sale.

Selling with positive equity

Selling a car with positive equity is a good place to be. It means the sales price or trade-in value is more than what you owe on the loan. So, you could walk away with some money in your pocket, or you could apply the positive equity to a new car loan.

When you sell a car with a loan on it, you will have to use the proceeds to pay off your loan and transfer the title. If you buy through a dealer, the dealer should take care of this process for you. If you sell directly to a private party, you will have to pay the loan balance yourself.

There are a few things you can do to make the process easier. For example, if you have good credit, you could use a personal loan to pay off the car loan before the sale so you have the title in hand. Then, you could take the proceeds and pay off the personal loan. Selling your car is much simpler when the auto lender isn’t involved and when you have a clear title. This process is also a way to potentially remove a cosigner from the auto loan to simplify the transaction.

Depending on the state where the car is registered, you will have to work with the Department of Motor Vehicles (or appropriate state titling agency) and the lender to transfer the title to the new owner. (If you plan to do a private sale, be sure to create a bill of sale and release of liability.)

Selling with negative equity

The process for selling a car when you’re underwater or upside-down is more complicated. You will not only have to pay the lender all the proceeds from the sale, but then you’ll have to pay more money to cover the negative equity amount. There are several options for selling the car and paying the loan debt in full when you’re dealing with negative equity.

• Cover the difference out of pocket. Depending on the amount of negative equity, you may be able to pay the difference from your savings or another source. If you must tap your savings, don’t deplete your emergency funds or forget other savings goals.
• Discuss options with your lender. Talk to your auto loan lender or another bank or credit union about your options. Your current lender may have refinancing options that could help.
• Wait to sell. Continue making payments on the vehicle until you have positive equity. If possible, keep the mileage low and take good care of the vehicle so the value will get a boost for being in good or excellent condition. Refinancing to a lower interest rate can help shorten the time it takes to build equity. You could make extra car payments or make a larger payment each month to build equity faster.
• Sell your car privately. You may be able to sell it directly to a buyer for more money than you’d get from a dealer. However, you and the buyer will have to handle all the administrative steps to transfer the title and registration and pay the loan off.
• Roll the negative equity into your next car loan. If you must get a new vehicle, you could trade in your old car and take out a new auto loan that includes the amount of the negative equity. Make sure you fully understand what’s happening because this approach will make you immediately underwater on the new loan. The monthly payment on the new car will be higher than it would be otherwise. If you want to get rid of that car before the loan is paid off, you could find yourself rolling over negative equity into the next loan as well. That’s a costly habit you should avoid if possible.

What to do when the bank wants the payoff before you sell your vehicle

The lender will require the full payoff amount before releasing the title to the buyer. If you have positive equity, the lender will send a payment for the difference. If you have negative equity, you’ll have to pay the lender the rest of the payoff amount before the new buyer will get the title.

When the bank wants the payoff before you sell the vehicle, you have a few options.

Refinance your current loan

You could lower the interest rate or extend the loan term to make the payments easier to manage. Refinancing to a lower APR could help you build equity faster so you could move into a positive equity standing or at least have less negative equity.

Get a personal loan

You can get a personal loan to pay off the auto lender so you have possession of the title. Then you can sell the car and use the proceeds to pay off the personal loan. If you don’t pay off the full balance, you will have to make payments on the personal loan until it’s paid off. Keep in mind there will be fees associated with getting the personal loan, so compare the cost of the fees with your other financing options.

Use your savings. Pay the remaining loan balance with your savings. Of course, you’ll have to have enough cash on hand to pay the difference.

How to sell a car with a loan: FAQ

Can you sell a car with a loan?

Yes, you can sell a car with a loan, but the loan will have to be paid off before you can transfer the title to the new owner.

How do I transfer my car’s title?

You must work with the lender and the Department of Motor Vehicles (or your state’s car titling agency) to transfer the title when the loan is paid off. A dealer will handle the process for a trade-in, but in a private sale, the seller and buyer will handle the paperwork.

Will selling a car with a loan hurt my credit?

Paying off your car loan early could lower your credit score to some extent, but the drop is only temporary.