Selling a car with an outstanding loan might feel daunting, but we’re here to simplify the process for you. 

We’ll walk you through every step, covering all your options—from private sales to dealership transactions—and provide useful tips to make the whole experience as smooth as possible.

Can You Sell a Car With a Loan?

Yes, you can sell a car with an outstanding loan. While it’s a bit more complex than selling a car outright, it’s entirely doable.

When you finance a car, the lender—usually a bank or credit union—places a lien on the vehicle. This lien allows them to repossess the car if you default on your payments. This essentially means they hold the title until the loan is paid off and the lien is removed.

Without a clear title, you can’t just sell or trade the car as you would with a fully owned vehicle. If you want to more about what exactly is a car title, you can refer to this guide – What is a Car Title and Why is it Important?

To move forward,

• You’ll need to know both your car’s current value and the remaining balance on your loan.
• With these numbers, you can figure out how much equity you have in the vehicle and whether it’s better to sell to a dealer or a private buyer.

Selling a car with a pending loan is straightforward when you work with a trusted dealership. They usually handle paying off the loan to clear the lien and take care of all the necessary paperwork, which makes the process smooth and straightforward for you.

On the flip side, selling privately can be a bit more challenging, especially if you don’t have the cash on hand to pay off the loan first and secure a clear title, which is necessary for transferring ownership to the buyer.

If you lack the funds to settle the loan upfront, your bank or credit union might have alternative solutions, which we’ll explore later in this article.

Step 1: Find Your Loan Payoff Amount

The first step in getting ready to sell a financed car is to know your loan payoff amount—essentially, the remaining balance on your car loan.

This is pretty straightforward.

All you need to do is reach out to your lender to get the exact payoff amount. If you’re unsure who holds the lien on your car, you can perform a simple lien search, which will give you the current lien holder and owner information from the MVC database. 

If you have a loan in New Jersey, click here: Title/Lien Search Online Request in NJ

Your payoff amount might not match what’s shown on your statement or coupon book exactly, due to factors like interest, late fees, or other charges. Also, keep in mind that some lenders may charge a prepayment penalty if you pay off your car loan early, so it’s a good idea to verify that.

When reaching out to your lender, have your car loan account number and other relevant details ready.

Tip: It’s a good idea to give yourself some flexibility with the payoff timeline. You can achieve this by calling your lender and speaking to a representative. This allows you to customize your payoff request, such as setting a 15- to 30-day payoff window.

Don’t Forget This:

If you have an extended warranty or GAP insurance, you might be eligible for a prorated refund if you cancel these. Typically, any refund will be sent directly to your lender once the cancellation is processed.

Check with your lender to see how they handle refunds from canceled policies and whether the refund will be applied directly to reduce your loan balance.

Step 2: Estimate Your Car’s Worth

The next step is figuring out how much your car is worth.

Getting a realistic estimate involves considering several factors, including the model and year of your car, its mileage, condition, and even location. Market conditions can also affect prices.

If your car has been well-maintained, with recent upgrades like new tires or brakes, be sure to factor those in your asking price. And if your car is still covered by a transferable regular or extended warranty, that’s another reason to demand for a bit more.

Consider a Mechanic’s Assessment: Having a mechanic inspect your car can be a smart move as well. Not only does this help you set a fair price, but it can also build trust with potential buyers, possibly allowing you to charge a bit more.

If you’re looking for more tips on how to increase your vehicle’s selling price, check out this guide: 5 Ways to Raise Your Vehicle’s Trade-in Value

Another reliable way to determine your car’s value is by using an online pricing guide. Here are three industry-standard resources:

• Kelley Blue Book
• NADA Guides
• Edmunds

Easy Way to Get Started

Our valuation tools are based on Kelley Blue Book standards, allowing you to quickly and accurately assess your car’s value. You can easily check your car’s worth with us. It’s free, and there’s no pressure to accept the offer:

Step 3: Calculate Your Car’s Equity

Once you have your estimated offer, it’s time to evaluate whether your car’s equity is positive or negative. To do this, simply subtract the remaining loan balance from your car’s current trade-in value.

• Positive Equity: You’re in a Good Spot!

If the value of your car exceeds the amount remaining on your loan, you have positive equity. This is a favorable situation.

For example, if your car is worth $4,000 more than what you owe, you won’t need to add any extra money from your pocket. You can keep the extra amount or apply it as a credit toward your next loan, reducing your monthly payments on a new vehicle.

• Dealing with Negative Equity

Now, let’s address negative equity. This occurs when your car’s value is less than your remaining loan balance, leaving you “upside-down” or “underwater” on your loan.

In this case, you’ll need to pay the difference out of pocket when selling your car. Alternatively, if you’re trading it in at a dealership, you have the option to add the remaining balance to your new loan.

You can refer to this guide in that case: Step-by Step Guide to Trade in a Financed Car

If the shortfall is minor, it might be manageable. However, if it’s a significant amount, you might want to think carefully. 

Rolling the deficit into a new loan could result in higher monthly payments and a larger overall debt, which could have long-term financial implications.

If you do plan to roll it to a new car loan, it’s best you settle for a good used car. This way, you can opt for a less expensive car, which typically comes with lower monthly payments.

Here is your guide to getting the best used car deal.

Step 4: Choose the Best Way to Sell Your Car: Four Paths to Consider

When it comes to selling a car with an outstanding loan, you’ll face the challenge of not having a clear title to hand over immediately. But don’t worry—there are ways to navigate this situation smoothly. 

Let’s explore your options:

1. Pay Off the Loan First: Simplify Your Sale

If you want to avoid any complications, paying off your loan before selling is your best bet. Most buyers won’t be comfortable handing over money when you can’t immediately transfer the title to them. 

Even if they trust you enough to proceed, they’ll likely want the car right away, which still has your name on it—definitely not an ideal scenario.

The ideal solution? If you have the funds and can wait for the bank to send you the title. This clears up the ownership, making the sale much smoother.

For a detailed guide on how to sell a car after receiving the title, check out this guide: How to Sell a Car in New Jersey? The Ultimate Guide (This Guide is valuable no matter where you are).

Pros and Cons of Paying off the Loan Beforehand

Pros

• You can show the title to potential buyers, giving them confidence in the transaction.
• The sale process is more straightforward, with less paperwork involved.

Cons

• You’ll need to pay off the entire loan balance upfront, which could be a significant amount of money.
• Waiting for the bank to send the title or lien release can take weeks or even months.

Taking Out a Personal Loan? Think Twice

If you’re short on cash, taking out a personal loan to pay off your auto loan might seem tempting. 

Well, this is not a good financial move.

First off, you’ll need an unsecured personal loan that covers your car’s full balance. This way, the lender won’t hold a claim on the title, and you’ll get a clear title.

If you have excellent credit, you might qualify for an unsecured loan, but remember, unsecured loans owing to their nature, can have significantly higher interest rates, even with good credit. Taking out this loan might also impact your credit score, making it harder to finance your next major purchase.

Although having a title in your name can simplify a private sale, remember that the title might take months to arrive, and in the meantime, you’ll need to find a buyer and pay off the loan. Interest on the personal loan will continue to accrue during this period.

If you still believe a personal loan is your best option, proceed with caution. Make sure you can repay it quickly. But before going down this path, we recommend exploring other options with your local bank or credit union, which may offer more favorable terms.

2. Work With Your Lender to Sell to a Private Buyer

One option is to work directly with your lender to facilitate the sale to a private buyer. 

Start by asking your lender how they’d like you to handle the sale with an outstanding loan. They might have a process in place to provide security for both you and the buyer.

• For instance, if your loan is with a small local bank, credit union, or one with local branches, they might suggest bringing the buyer to a branch to finalize the paperwork. 

• If your lender is online-based, they might have a partner institution including even a bank, where they can probably direct you to complete the process.

Having the buyer pay off your outstanding loan directly to your lender can boost their confidence in the deal. However, be ready for some potential buyers to turn you down, as not everyone is willing to navigate the extra hassle involved

Pros and Cons Of Private Sale at Lender’s Setting

Pros

• Selling to a private buyer can get you a higher price.
• There’s no need to pay off the loan upfront—the buyer pays your lender directly.

Cons

• Not all lenders allow for this service.
• The buyer might not get the title immediately and could feel uneasy about the process.
• Selling privately generally takes longer than selling to a dealer.

3. Use an Escrow Service

Given the buyer’s concern about potentially losing money when the seller can’t immediately hand over the title, an escrow service can be a viable solution.

Escrow services provide a layer of security for both parties. They take charge of looking over your loan payments and the necessary paperwork. After using the buyer’s funds to pay off your loan, the escrow service will release the remaining balance to you.

An Escrow service isn’t free, though the fee is usually quite reasonable.

Important Note: For an escrow service to work effectively, both parties need to fully trust the escrow agent. This means using a reputable, recognized organization rather than a random agent whose credentials you cannot verify.

Pros and Cons of Using an Escrow Service

Pros:

• Provides security and peace of mind for both the seller and buyer.
• Ensures a smooth transaction and title transfer.
• You can sell directly to a private buyer without having to pay off the loan upfront.

Cons:

• There’s a fee for the service, which can eat into your sale proceeds.
• Both parties must trust the escrow agent, adding another layer of complexity to the transaction.

4. Sell or Trade In to a Dealer

Selling privately can sometimes get you a higher price if you know the ins and outs of the process. However, it also means you and the buyer will have to handle all the paperwork yourselves. 

If you want to avoid the hassle, selling or trading in your financed car at a trusted dealership like Schumacher Chevrolet Group is a good option if you want a hassle-free sale. We’ll take care of the entire payoff process for you.

While some dealers might offer less for a trade-in than a cash offer, at Schumacher Chevrolet Group, our offer is the same whether or not you’re buying your next vehicle with us. Ready to get an offer? Check it out here.

Pros and Cons of Working with a Dealer

Pros

• Quick and straightforward process with the dealership handling the loan payoff.
• Potential tax savings on your next purchase, as many states subtract the trade-in value from the price of your new car, saving you hundreds or even thousands. If you want know more about taxes, when selling a car in New Jersey, refer to this guide – Do You Pay Taxes When Selling A Car In New Jersey?

Cons

• Selling privately can fetch you a higher price, though it requires negotiation skills.

Tip: Choose a dealer that follows industry standards to value your car fairly. For example, we use the trusted Kelley Blue Book guidelines to make you a competitive offer.

Step 5: Wrapping Up the Sale—Documents, Requirements, and Your Loan

As mentioned earlier, selling your car to a dealership is straightforward, but if you’re considering a private sale at the lender’s setting, there are a few important steps to consider.

Contact Your Lender First

 Since your lender holds the title to your vehicle, they’re your go-to for this process.  They’re invested in ensuring the sale goes smoothly for both you and themselves as the lienholder.

Make sure to ask your lender about the specific paperwork and funds you and the buyer will need to provide for a smooth transaction. Handling these details in advance will save you time and hassle later on.

Satisfy the Lien

• Positive Equity

If your car’s value exceeds what you owe, the buyer will pay the full sale amount to your lender. Your lender will then issue you a check for the difference. Alternatively, the buyer might give you two checks: one for the loan payoff and another for the remaining equity.

For example, if you owe $8,000 and sell your car for $18,000, you’ll pocket $10,000.

• Negative Equity

If your car’s value is less than what you owe, the buyer will pay the sale amount to the lender, but you’ll need to cover the shortfall.

For instance, if you owe $8,000 and the buyer pays $6,000, you’ll need to pay the $2,000 difference.

If you have good credit, you might consider a personal loan to cover the gap, though as discussed above, personal loans tend to be pricier than car loans, so pay it off as quickly as possible.

Get a Clear Title

The steps can vary depending on your state’s DMV rules.

Generally, once you pay off the loan, the lender will sign the title over to you. Then you, as the seller, can sign the title and give it to the buyer. The buyer will take the signed title and other necessary paperwork to the DMV to get a new registration and title.

If the lender doesn’t have the title right away, which can happen, you might need to get a new one printed at the DMV.

In New Jersey, the lender usually submits a lien release letter to the Motor Vehicle Commission once the loan is paid off. Make sure to get a copy of this lien release letter. It should include:

• Vehicle details (year, make, model, VIN)
• Notarized if the lender is not an institution but an individual

Take this to the DMV, pay the fee for a new title, and sign it over to the buyer.

Finalize the Sale

The buyer will take the signed title and any necessary documents to their local DMV to complete the car registration and title transfer.

In addition to addressing the lien, there are a few other key steps and documents to consider, which may vary depending on state requirements:

• Drafting a bill of sale
• Submitting a Release of Liability (if required by your state)
• Canceling your auto insurance
• Removing your license plates

For a comprehensive guide on the vehicle transfer process, refer to this guide: How to Sell a Car in New Jersey? The Ultimate Guide

Take Care of Taxes

Before you proceed with selling a car that still has a loan, it’s crucial to understand the tax implications tied to your sales strategy to avoid any unexpected expenses.

Depending on how your loan was structured, taxes might have been paid upfront or, more commonly, they could be included in your monthly payments. It’s important to check with both your lender and your state’s Department of Motor Vehicles to determine if you’ll owe any taxes once the car is officially in your name.

If you find out that taxes are due, inquire whether there’s a grace period allowing you to transfer the car to a new buyer within a certain timeframe without having to pay those taxes.

Selling to a dealership? Don’t Forget This

If your car has positive equity, you can use it as a down payment on your next car or request it in cash. For negative equity, be cautious. You can either cover the difference yourself or roll it into your new loan, but the latter can increase your debt.

To initiate the process, the dealer will require certain paperwork to verify ownership and loan information, including:

• Your loan account number
• Your current loan balance
• Your driver’s license
• Your vehicle registration
• Your car keys
• Your car’s title (if available)
• Proof of insurance
• A printout of your trade-in value (if obtained)
• Maintenance or repair receipts

Dealers typically handle paying off your old loan, but get written confirmation from both the dealer and lender that the loan has been fully settled to avoid any surprise bills.

Moreover, double-check that the trade-in value stated in your new car contract matches the amount you agreed upon during negotiations.

Before you finalize your new loan agreement, take the time to thoroughly review the contract. Make sure you understand all the terms and are comfortable with them before signing anything.

Related: How To Get The Best Interest Rate On A Used Car

Does Selling a Car with a Loan Affect Your Credit Score?

Selling a financed car will close out your loan account, which might cause a temporary dip in your credit score. 

Paying off the loan early could slightly lower your score since it reduces the variety in your credit mix and shortens your credit history. However, this effect is generally minor. On the upside, settling the loan can improve your credit utilization ratio by freeing up credit and saving you on interest.

Even with a small dip in your score, it’s typically much less significant than the impact of missed car payments.

Be aware that some lenders may impose prepayment penalties. Although these situations are relatively rare, it’s wise to check with your lender about any potential fees. Additionally, make sure there are no late or missed payments during the sale process, as these can negatively impact your score.

In some cases, the lender might perform a hard credit inquiry, particularly if you roll over your loan balance to a new car loan or choose to refinance. While this can lower your credit score, the effect is usually short-lived.

Can I Transfer Finance to Another Person? 

With monthly car payments averaging between $650 and $700, they can quickly become a financial strain, especially during tough economic times.

If you’re struggling to make your payments, you might wonder if someone else can take over your car loan. The answer is yes, but it’s not a straightforward process and can be somewhat complicated.

While most lenders are not keen on auto loan assumptions, some do allow it. This means you can transfer both your loan and the vehicle’s ownership to another person. However, there’s a catch: you will have to find a buyer who has a credit report that your lender assumes fit for taking over the loan responsibility. 

This just makes the whole process more complicated for you as a seller. 

But if you do want to give it a shot, the right approach would be to contact your lender, explain your situation, and see if they’re willing to transfer the loan. It’s also smart to review your loan documents carefully for any clauses related to auto loan transfers or assumptions.

Do not forget to inquire about the fees associated with the transfer along with the minimum credit requirement and other potentially important factors.

Stuck with Payments? Consider Refinancing Instead of Selling

If you’re finding it hard to keep up with your car payments, refinancing your loan could be a practical alternative to selling your vehicle. However, whether refinancing is the right choice for you depends on several important factors.

To qualify for refinancing, you’ll need to meet certain criteria set by the lender. These usually include the car’s age, mileage, and how much you still owe on your current loan.

Refinancing means getting a new loan with better terms to pay off your existing one. For instance, you might choose to extend your loan term to lower your monthly payments. Just remember, opting for a longer term could mean paying more in interest over time.

If you’ve been making your payments on time and have good credit, refinancing might help you snag a lower interest rate. This can reduce your monthly payments and could even help you pay off your loan sooner.

Before diving into refinancing, have a chat with your lender. Make sure to weigh the interest rate, terms, and any potential effects on your credit. 

Final Thoughts

Selling a car with an outstanding loan is definitely feasible, and there are more options available than ever. However, it’s not as simple as selling a car that is completely paid off.

If navigating though a private sale, it’s importantly to communicate transparently about the existing loan and outlining the process you’ll follow. While you’re selling your car, it’s also crucial to keep up with your auto loan payments. Missing or delaying payments can harm your credit score.

However, be ready for some potential buyers to turn you down, as not everyone is willing to navigate the extra hassle involved. This really makes working with a reputed dealer that you trust so much easier and hassle-free.

If you are in or around New Jersey, you can consider the Schumacher Chevrolet Group.

As one of the top-rated dealerships in the state, with nearly a century of service, we pride ourselves on offering top dollar for quality used cars, trucks, and SUVs. Our goal is to make the selling process as simple and transparent as possible.

Just use our ‘value your car’ calculator designed with Kelly Blue Book, and we’ll provide an offer to buy your car today, valid for up to 7 days.