How to Sell a Car with a Lien or a Loan On It

Cole Mayer  | 

Selling a car can be tricky business. If you try to sell before you have paid off your initial car loan, there is technically a lien on the car from the lender. That means the lender technically has a claim of ownership — the title isn’t entirely yours to transfer. That doesn’t mean you can’t sell the car, even if the loan is upside down; it just means the process is more complicated.

Selling to an Auto Dealer

One of the easiest ways of selling a car you haven’t paid off is selling to an auto dealer. It’s not technically a trade-in, since you don’t actually own the car.

Since auto dealers have completed hundreds of these transactions, it should be smooth. They’ll do all the appropriate paperwork, meaning the only thing more convenient would be selling after your loan is paid off.

If the dealer is not also your lender — for example, getting your auto loan through Toyota while buying at a Toyota dealership — you give the dealership power of attorney, and they contact the lender.

Depending on the dealer, you may not have to buy another car from them as part of the deal. This is especially true of dealers that mainly work with used cars, as they can turn around and either sell the car or put it to auction.

The dealer will pay the existing balance on your loan, and write you a check for any balance leftover from the deal. Be sure you receive documentation that your lien has been satisfied — that is, the loan has been paid off — before you leave.

Contact Your Lender and Determine the Official Payoff

If, however, you are trying to make a larger profit than a dealer will afford you, you will want to sell the car yourself. This, of course, means doing nearly all of the work yourself.

Your first step is determining exactly how much you have left to pay off. Because of interest rate changes, this can fluctuate frequently. Call your lender and ask what your official payoff amount is. Since you technically won’t be selling the car until after you pay off the loan, this is important. It’s what you will pay either before or during the title transfer. Request a payoff letter to have the amount in writing. The letter will tell you where to wire the money and what types of payment are accepted. While on the phone with the lender, ask if they have any special procedures for selling to a third party while the car is still financed. There may be early payoff penalties, or they could have an office where you and the third party can meet to complete the transaction, easing the selling process.

Disclose Your Lien to the Potential Buyer

When trying to sell your car, it’s important to inform potential buyers that there is still a lien on the car. This may make some buyers wary, while others may simply want to be present when you pay off the loan and the title is transferred.

Prepare to Handle the Sale

Prep work here will make the entire process go smoother. Since you won’t be working with a clear title — a title that’s been fully paid off in advance — you’ll need to use the buyer’s money to pay off the loan while transferring the title to them at the same time.

Doing this at the bank or lender’s office can give the buyer peace of mind, as you could theoretically just disappear with their money. The buyer can watch you pay off the loan with their money and receive the title.

Consider using an escrow service if your lender or bank’s office is not available. The service will take your payment from the buyer, and hold the title from you until the transaction is complete. For a fee, they are the middleman that makes sure there’s no funny business in exchanging money for the title.

Transfer the Car Title

Once the money has been used to pay the loan, the title is clear. As mentioned, this could be transferred to the escrow service, which will then send it to the buyer; it can be given directly to the buyer; or it can be sent by the lender to the buyer. If the buyer is financing the car, your lender will send the title to the buyer’s lender.

When Possible, Pay Off Your Car Loan Before Selling

Paying off the loan, even if it’s upside down, can make selling the car easier. You won’t have to go through the steps of using the buyer’s money to pay off the loan. Even if you need to get another loan, such as a peer-to-peer loan, to pay off your auto loan, it could be the difference between selling the car and being stuck with a vehicle you don’t want.

In this scenario, you use the second loan to pay off the auto loan, and the buyer’s money to pay off the second loan. Because it will be short term, interest won’t have time to accrue. The other major benefit is that you will already have the title, and can immediately hand it over to the buyer in exchange for cash.

Can you sell a car with a lien still on it? Other than being a bit tricky, and having to shuffle money and title at the same time, yes, you can. Be careful with the transaction, and use a third party if possible. The buyer will have a car, and you will have your money.

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A former newspaper journalist, Cole spends his free time reading, writing, playing video games, watching movies, and learning about every subject under the sun. He lives with his wife and daughter in Idaho. Follow Cole on Twitter: @ColeMayer42