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

Photo by Zac Harris on Unsplash

Big Terry’s selling a V8 Commodore Ute at a great price, but he’s got finance owing on it. Is it a good idea to buy or sell an encumbered car?

• Buying a car with finance owing
• Selling a car with finance owing

Secondhand car buying can be a frugal way to acquire a relatively modern car while avoiding much of the depreciation costs. It’s all too easy to trawl through Carsales or Gumtree and find the car you want at a great price, but sometimes, the cars with the best prices have finance owing on them. Such a car is called an ‘encumbered’ vehicle, which means there is a secured loan attached to the car, so the debt effectively travels around with the car and not the individual. 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.

Buying a car with finance owing

Buying an encumbered vehicle is legal, but there are some big-time considerations to make before you take the plunge. This section refers to private selling, rather than dealership selling as dealers are legally obliged to have finance-free cars on their lots.

How to check if a car is encumbered

If you have seen a good deal, or a car that you really want, but you’re not sure if there’s money owing on it, a useful way to check vehicle finance status online is by doing a PPSR check (personal property securities register). If you’ve got the car’s VIN, you’re good to go.

For just $2 you can find out if a car is encumbered or not through ppsr.gov.au - be aware of third-party sites that do the same thing and charge extra. This check will also tell you if your car has been written off, among other details. Ideally, the PPSR check should align with what the seller has told you… if they’re honest.

How to buy an encumbered vehicle

Although an encumbered car essentially means it was purchased using a secured loan, the loan details are still with the previous owner. If you purchase a car under finance, the loan is still registered under that person, and if they fail to repay the car, then the finance company can repossess your car, leaving you out of pocket and without a car. Now, there’s every chance you purchase the vehicle and the previous owner is a trustworthy fella, and pays off the loan with the cash you gave them prior to signing away ownership to you, but is that a risk you are willing to take?

• If you’re intent on buying an encumbered car, before the current owner transfers ownership to you, it can be useful to complete the sale at the financial institution where the loan is held.
• The lender can facilitate your payment to go directly to them, rather than the seller, and this can eliminate a lot of risk associated with buying an encumbered car.

Ideally, this should be organised by the seller as the onus is on them to contact their financier to signal their intent to sell the car.

Below are some fixed rate loans for new cars 

Data accurate as at 20 February 2020. Rates based on a loan of $30,000 for a five-year loan term. Products sorted by advertised rate, then by company name (A-Z). View disclaimer.

Buying encumbered vehicle risks

Buying an encumbered vehicle without ensuring the title is clear with the financial institution can be fraught with risk in two key scenarios:

• The previous owner takes your cash and doesn’t pay off the debt: This means that the owner has defaulted on the loan, and as it’s a secured loan, means the lender will go hunting for the car. This means that you could potentially be left out of pocket, thanks to paying off old mate who has now skimmed off with your money and not repaid his debt, AND have the financier take your car. So no money, and no wheels.
• You crash your car: While there’s nothing stopping you taking an insurance policy out on the car, in the event of a total write off, the money that they pay out would likely go to the financier, as it is technically their car. So once again, you’ve got no wheels, and no money, and probably a case of whiplash or worse.

Buying an encumbered vehicle can carry significant risk for you, the ‘owner’, as it relies on a great deal of trust between buyer and seller, and driving around a vehicle that potentially isn’t even technically yours. If you’ve had a chat to the seller and you’ve agreed to settle the finance before transferring ownership, then no problem, but if not, the risk may be something you’re not willing to accept - even despite the seemingly cheap price of the vehicle.

Other assumptive risks of buying an encumbered vehicle

While invariably many encumbered cars get sold every year in Australia, it can be only natural to assume the worst and question why a vehicle under finance is being sold in the first place.

• If the seller can’t afford the repayments: If the seller can’t afford the repayments, then chances are they can’t afford other maintenance items on the car either such as: tyres, servicing, repairs and even registration. This is where enlisting a mechanic to inspect the vehicle can be money well-spent; the roadworthy certificate only covers basic items. The PPSR check should also tell you the car’s registration details.
• The seller wants to upgrade: Life changes happen, and upgrading or downgrading can be a perfectly legitimate reason for selling an encumbered vehicle. Maybe their two-seater roadster can’t fit a child seat? Or maybe they moved to the city and no longer need a large costly vehicle? Or maybe Big Terry no longer needs his ute as he realised most women don’t care about V8 engines.

While buying an encumbered vehicle may seem like an automatic big fat no for a lot of people, the car may be worth it, whether due to its price, condition, mileage or other factors. However, there’s a few extra things to think about before taking the plunge, so it’s useful making sure all the checks and balances are done.

Selling a car under finance

Selling a car under finance is legal, but it must be disclosed both to the financier, and to the buyer beforehand. Being that a buyer can and should do a PPSR check before purchasing a vehicle, it’s probably best to be honest about your car’s finance status anyway.

• As you’ve got a secured loan on the car, it will likely be subject to your financier’s terms and conditions that you advise them if you’re selling your car.
• Being that a secured loan is a contract, you may be subject to break-contract fees and other costs, plus 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 pay out this remainder - called residual debt.

If you’re selling your car, you may not have enough cash upfront to pay out the loan early, and this is where the buyer comes in. Potentially the easiest way to sell a financed car is to get you, the buyer and the financier all in the one room (ideally at the credit institution where you took out your loan) 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 wipe your hands clean.

Trading in a car under finance

Trading in an encumbered car can be a legitimate way to upgrade, and without the hassle of having to go through a private buyer. Trading in at a dealer can make the process a lot smoother, usually at the expense of not getting as great a deal on the sale of your car, versus if you just sold privately.

• You will likely have to tell the dealer how much you owe on the loan, and then to secure the sale they will need to meet this value on the trade-in amount. This could mean you could still be out of pocket, should the car’s loan amount be high, and the dealer gives you a stingy trade-in offer for your current vehicle.
• After agreement, the dealer then deals with your financier directly.

Trading in your encumbered car at a dealership can remove a lot of the hassle associated with selling, but keep in mind that all dealerships want to make a profit somehow.

Refinancing a car loan

Refinancing your car loan is another option, and removes the encumbrance on your vehicle. It can essentially allow you to transfer the loan to another asset, whether that’s to you (an unsecured loan), another car you own outright, or to your house via a home loan (see how to consolidate debts with a home loan).

• Refinancing through an unsecured loan will likely attract a higher interest rate, as the lender assumes more risk as they don’t have an asset to repossess should you default.
• Refinancing on a car you own outright can be useful and may offer you a more competitive interest rate than if you just took out an unsecured loan.
• Refinancing your home loan to consolidate your car loan debt could see you gradually paying off your car loan debt as part of your regular mortgage repayments, although bear in mind this means you’re essentially stretching out a short-term debt over a much longer-term, which could cost you significantly.

All of this may come with associated costs of refinancing, such as extra loan administration fees, higher interest rates (in the case of unsecured loans) and other hurdles, so it pays to take into account your own situation before jumping into any new financing options.

So there you have it, there’s three overarching options in which you can sell an encumbered vehicle; each category poses its own risk, so it pays to do a bit of life admin and assess which option is right for you.

Saving.com.au’s two cents

Buying or selling an encumbered vehicle can seem like a massive headache, but if you take a couple of steps to do everything the right way, it can be a great way to purchase a secondhand vehicle.

The key is to ensure the buyer, seller and financier are all communicating with each other and that the buyer’s money goes into the financier’s account.

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 that isn’t even in your name carries many 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 options.

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Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

• The big four banks are: ANZ, CBA, NAB and Westpac
• The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2019. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
• The larger non-bank lenders are those who (in 2019) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.

Some providers' products may not be available in all states.

In the interests of full disclosure, Savings.com.au and loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*The Comparison rate is based on a $30,000 loan over 5 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.

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