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Selling Your Car When You Still Owe Money On It? Here’s How You Do It

Are you trying to sell a car that you still owe money on? If so, the process for selling your car will be effected by the answer to two questions:

  1. Do you owe more than the car is worth?
  2. Are you buying another car from an auto dealer once your car is sold?
How to sell a car you ow money on

Based on your answers, you can follow the instructions in the appropriate section below:

What To Do If You Owe Less Than Your Car’s Value

If you answered “No” to question #1, than your loan balance is less than the value of your car, meaning that you have equity! This makes your process really simple once you’ve found a buyer:

  1. If the buyer is paying cash, your buyer’s credit union or bank will process the transaction for a fee. Basically, the buyer’s bank will take the cash from the buyer, have you (as seller) sign some paperwork, and then the buyer’s bank will pay off your car, give you a check for the equity you have, and give the buyer his or her title.
  2. If the buyer is financing the purchase, their bank or credit union will do exactly the same thing.

Short of having a free and clear title, selling a car that’s worth more than the outstanding balance is pretty easy. Just meet your buyer at their bank or credit union and they’ll take care of the rest.*

However, if the answer to question #2 is “Yes,” please take a moment to learn about a “pass thru” transaction below, as a pass-thru is a great way to reduce your sales tax obligation.

*NOTE: Not every bank or credit union offers this service…your buyer should call ahead.

What To Do If You Owe More Than Your Car’s Value

If you answered “Yes” to question #1, than your loan balance is greater than the value of your car, meaning that you have negative equity. This is commonly referred to as being “upside down.”

If you are upside down in the car you’re trying to sell, you need either cash or the help of your local auto dealer (more on that below).

If you want to put together some cash, you need enough to cover the difference between the amount you owe and the amount your buyer has agreed to pay. To process the sale of your vehicle you will:

  1. Meet your buyer at his or her bank. The bank will determine your loan payoff and then ask you for payment. In many instances, your buyer’s bank will want a check directly from your bank.
  2. Head over to your bank to collect a check in the exact amount.

Note: Do not get the bank draft or check to cover your payoff until you’ve confirmed the payoff figure with your buyer’s bank. The buyer’s bank is going to get a payoff figure that’s good for 5-10 business days in the future, which means the amount they ask for will be slightly higher than the amount you hear when you call your bank yourself and request a payoff.

Are You Going to Buy Another Car From Your Local Dealership After You Sell?

If the answer to #2 is “Yes,” you might be able to work out what is known as a “pass thru” transaction with your local dealership.

A pass thru works like this:

  1. After you and your buyer agree on a price, you work out your next purchase with the dealership.
  2. As a condition of your purchase, you ask the dealer to take your car in on trade and then immediately sell your vehicle to your buyer for the agreed upon price.
  3. The buyer buys your car from the dealership immediately after you trade it in…hence the name “pass thru” as the keys to your trade-in basically pass thru the dealer’s hands to your buyer

The advantages in a pass-thru are numerous:

  • Because you’re trading in a car, you only have to pay sales tax on the difference between what buy and what you trade. This means that a pass thru will reduce your taxes.
  • If you owe more on your car than its’ worth, your dealership can add the negative equity to the price of your next car…you might not need to come up with any cash if you’re upside down.
  • The dealership can arrange financing for your buyer, which might be helpful to your buyer.
  • Depending on the age of the car you’re selling, the dealership might even be able to offer your buyer an extended warranty.

The only disadvantages to pass-thru deals are:

  • There are a lot of moving parts, as you have to sell and buy a car at the same time
  • The dealership is going to ask your buyer to pay a dealer handling fee as a condition of the pass-thru. At some dealerships, this fee is hundreds of dollars.
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2 Comments Post a comment
  1. Mike T #

    The question of how to sell your car with an auto loan remaining does not need to be difficult or complicated. In fact, the most confusing aspect of selling a car with a lien on it can be the word ‘lien’ itself.
    Lien is another word for financial interest. While you owe money to a bank, the bank has a lien on your car. Selling a car you have not yet paid off is not as simple as selling a car you own outright.

    March 28, 2013
  2. will #

    Contact your lender for an exact payoff balance and ask to make sure they physically have the title in their possession. Have your buyer bring two cashiers checks – one to you for the amount in excess of your loan balance and a second made out to the lender to pay off the loan. Most lenders will then sign off on the front of the title, releasing their lien, and give or send it to you. You’re then required to sign off as the registered owner and give the now “free and clear” title to your buyer to be transferred into their name. If you are selling your car for less than what you owe on it, you’ll have to come up with the difference to make the payoff and obtain the title.

    March 28, 2013

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