How to sell or buy a car with finance owing on it

Buying a used car can be a frugal way to secure a set of wheels while avoiding much of the depreciation costs, but it can also mean considering vehicles that still have finance owing on them.

Such a car is called an 'encumbered' vehicle, which means there is a secured loan attached to the car.

Since the car is security for the loan used to buy it, if the seller simply stops making their repayments after handing over the keys, their lender could repossess the car from the new owner to recoup its loss.

So, is it a good idea to buy or sell an encumbered vehicle? It's legal, but there's things you should know before taking the plunge.

Should you buy an encumbered vehicle?

If you're considering an encumbered vehicle, you're probably buying on the private market, perhaps through Facebook Marketplace, Gumtree, or CarSales.com.au. I know this because car dealerships are legally obliged to only offer finance-free cars.

Buying a car from another individual, rather than from a business, comes with additional risk. Though, when it comes to finance, you don't just have to take the sellers word for it.

How to check if a car is under finance

You can check if there's money owing on a car by doing a Personal Property Securities Register (PPSR) check. To do this, you'll need the car's vehicle identification number (VIN).

For a $2 fee, you can find out if a car is encumbered through a PPSR check. Stay on your toes, as plenty of third-party sites exist offering the same services for an extra charge.

A PPSR check can also tell you whether the vehicle you desire has been written off or stolen previously, thanks to the PPSR's links with the National Exchange of Vehicle and Driver Information System (NEVDIS).

1. Saving.com.au’s two cents

Buying or selling an encumbered vehicle can seem like a headache but it can potentially pay dividends, as long as you properly protect yourself financially. 

Handing off money to a seller carries a lot of risk and requires a great deal of trust they will pay off the loan on their end - driving around an encumbered vehicle with a loan that's not in your name carries significant risks.

If doing the checks and balances of buying or selling an encumbered vehicle seems like too much of a headache, then it’s probably best to consider other vehicle purchasing options for your new wheels.

How to buy an encumbered vehicle

When a car is encumbered, it essentially means it was purchased with a secured loan, and the loan details are still likely with a previous owner. If you purchase a car under finance, the loan is still registered to that person. If they fail to make their repayments, the lender may be able to repossess your new wheels, leaving you out of pocket AND without a car.

Now, there's every chance the seller is trustworthy and will pay off the loan with the cash you gave them before signing away ownership to you. Or they might be financially responsible and continue to make their loan repayments, even after selling the vehicle to you. But is it a risk you're willing to take?

1. If you’re intent on buying an encumbered car, it can be useful to complete the sale at the financial institution where the loan is held. That way, the lender can facilitate your payment to go directly to them to repay the loan, rather than into the seller's pocket.

Insurance risks when buying an encumbered vehicle

Owning an encumbered car also presents an insurance risk. While there's nothing stopping you insuring such a car, in the event of a total write off, any money your insurer pays out would likely go to the lender behind the loan, as it's technically their car.

In such a case, you may be left with no wheels, no money, and probably a case of whiplash.

Can you sell an encumbered vehicle?

Selling a car under finance is legal, but it must be disclosed both to the financier and the buyer beforehand. And given a buyer can simply perform a PPSR check, it's best to be honest about your car's finance status anyway.

There are other things you should be aware of before considering selling a car you have a loan secured against:

• You will likely be subject to your financier's terms and conditions, one of which is likely that you advise it if you're selling the car

• You may be subject to break-contract fees and other costs, and may have to pay out the remainder of the car's determined value

• If the sale price is less than the amount left on the loan, then you will likely have to repay the residual debt

If you're selling your car, you may not have enough cash to pay out the loan early, and this is where the buyer comes in. The easiest way to sell a financed car may be to get you, the buyer, and the financier all in the one room (or on one email thread) and have the buyer agree to deposit their cheque or cash into the financier's account. You can then sign over ownership and registration details and, in the process, wipe your hands clean.

Trading in a car under finance

Trading in an encumbered car can be a legitimate way to upgrade without the hassle of having to go through a private buyer. Trading in at a dealership can make the process smoother versus if you were to sell privately.

To do so, you'll likely have to tell the dealer how much you owe on the loan and then, to secure the sale, it'll need to meet this value on the trade-in amount. That means you could still be out of pocket. After making an agreement, the dealer will likely interact directly with your financier.

Can you remove a car as security on a loan or finance?

Refinancing your car loan may also you to remove the encumbrance on your vehicle. Refinancing to an unsecured car loan or another secured loan product that uses a different asset as security may meet this need. You might also choose to consolidate multiple debts (including your car finance) into a different loan product and potentially save money and stress in the meantime.

Read more: How to consolidate debts with a home loan.

However, there are a few things to consider before refinancing a car loan:

• Refinancing to an unsecured loan will likely attract a higher interest rate, as a lender assumes more risk offering unsecured loans compared to secured loans.

• Refinancing a home loan to consolidate car loan debt could see you paying off your car loan debt for longer, as mortgage loan terms are generally decades, rather than years, and this can cost you significantly in interest over the longer term.

• Refinancing can be expensive, with fees often charged by both a person's new and old lender.