It is possible to sell a car on finance when you’re still paying off the auto loan. There are plenty of reasons this situation could come up: your household’s needs might change, you’re moving and can’t take the car with you, or you can no longer afford the car.
When selling a financed car without paying it off, it's important to understand that the car will have debt owing on it, which is known as a lien. It can be difficult to find a private buyer for a vehicle that has a lien on it because the car could be repossessed if the debt is not paid, even if the person who owes the money no longer owns the vehicle. If you want to sell a car on finance, you’ll need to follow specific steps to keep yourself and its future owner out of trouble. Here’s a look at how to sell a car on finance in Canada.
Can You Sell a Car on Finance?
- What is the Process of Trading In a Car?
- The Loan Term
- The Payoff Amount
- What are Positive Equity and Negative Equity?
- The Tax Benefit of Trading In
- Don’t Forget the Paperwork
- Frequently Asked Questions (FAQs)
What is the Process of Trading in a Car?
If you’d like to use your vehicle that’s still under car finance as a trade-in, it’s doable, but there’s some paperwork involved. This is because until your car loan is paid off in full, you don’t own the vehicle, your lender does. You’ll need your lender to agree, and part or all of the car’s value received for the trade-in goes toward paying off your car loan.
The first step is to get in touch with your auto loan lender and make sure they’ll allow the sale. If they agree, they can work with whoever is arranging the trade-in to make sure your loan is paid off as part of the purchase process for your new vehicle. It’s generally recommended to speak with your finance company before you try to sell the car, rather than after you’ve started the process. You need them to be on your side, so you’ll want to loop them in early.
Your lender and the car dealership or online partner arranging the trade-in will work together on an appraisal and decide on a value for the trade-in vehicle. (It’s a good idea to get a second opinion on this to ensure you’re getting a fair offer. One such source is the CarGurus Sell My Car feature, which can instantly give you an estimate of your car’s value.) If they decide the car is worth more than what you owe on it, that simplifies the process: the dealership pays off your loan, and you can use whatever is left over as a down payment on a new vehicle. However, if your current vehicle is worth less than what you owe, then you’ll be responsible for paying the remainder. We’ll discuss that in the positive equity vs. negative equity section below.
The Loan Term
Before you can sell your car, you’ll need to pay off your auto loan. Sometimes you don’t really see this part of the process, such as if you have a dealership complete a trade-in on a financed car. Other times—such as if you decide to sell the car on your own through a private sale—you’ll need to understand the total amount owing on your finance agreement and find a way to pay it off before you can complete the sale.
To understand how much you’ll need to pay to close your auto loan, there are a few terms it will be helpful to know. One is the loan term, which is the amount of time remaining on your auto loan, usually calculated in months. When you bought your car, you agreed with the finance company to pay off the loan over a period of time, such as 60 months, 72 months, or 84 months. That period of time is known as the loan term.
If you have only a few months remaining in your financing term, it should be relatively easy to pay off the loan early. If you’re still early on in your loan’s term, though—say, within the first two-thirds of it—then you likely still owe a fair amount of money on your vehicle. This is because of how interest rates on loans are calculated: your earlier payments go more toward the loan’s interest than paying for the actual value of the vehicle (in loan terms, this is known as the principal).
In most cases, you’ll need to pay off the loan upfront before you can complete the sale and ownership transfer. In specific cases such as when you’re dealing with dealerships or trusted online partner, or you have very cooperative buyers and lenders, you can go through with the sale and then use the proceeds to pay off the loan, thus removing the lien from the vehicle. If you do this with a private buyer, expect the car buyer to want proof that the debt is paid, either through witnessing the payment in person or providing official paperwork.
The Payoff Amount
Before you try to sell a financed vehicle, it’s important to know the outstanding balance, the amount you’ll need to pay off to close the loan amount still owing on it. This payoff amount changes each month after you make a payment. Ask your lender for the payoff amount, and they’ll provide a statement detailing the remaining loan balance and how much the settlement figure will be to conclude the loan and own the car outright.
What are Positive Equity and Negative Equity?
There are two factors working against you if you’re trying to sell a car that’s financed while you’re still early in the loan.
One is how new car loans are structured: interest is calculated monthly on the amount of principal still owing, which means that because the amount you owe is higher at the start of your loan, your interest payments are higher, too. But loans are calculated to give lenders the same monthly payments over the loan term, so more of your payment goes toward interest and less toward the principal.
The other factor is lost value of your car during ownership, a process known as depreciation. A new car loses some of its value the second it’s driven off the dealership lot. That’s because as soon as you leave with a new car, it becomes a used car.
Between depreciation and how loans are calculated, if you were to sell your car just a couple of months after you bought it, the value of the car would be worth less than the value of the loan you took out to buy it. When that happens, you’re in what’s known as negative equity: you don’t have enough equity built up in the vehicle to cover the payoff amount on the loan if you sell it. This is sometimes called being “upside down” or “under water” on your car loan.
Later in your loan repayment, when your principal has come down and the interest takes up less of your payment, it’s more likely that you’ve paid down enough of the loan to pay down the remainder of your loan with what you’d get for the car in a sale. This is known as positive equity: you have enough equity in the vehicle to cover the payoff amount if you sell it. You may even make a profit at this point, depending on the market value of your vehicle and the amount owing.
If you have negative equity in your vehicle, you can still sell it. You’ll need to make up the difference in what you owe, though, either by securing a separate personal loan or rolling the amount you owe into your next car loan. It’s important to be cautious about this: negative equity can become a downward spiral your financial situation into serious trouble if you don’t keep your debt at manageable levels. It may also impact your credit score and your ability to secure other forms of credit such as credit cards.
The Tax Benefit of Trading In
Trading in your old vehicle comes with another benefit. When you buy a vehicle—whether it’s a new or used vehicle, and whether you buy it from a dealership or privately—you’ll most likely owe provincial sales tax (PST), retail sales tax (RST), or harmonized sales tax (HST) on that vehicle, depending on where you live in Canada. When you use your old vehicle as a trade-in, its value is deducted from the cost of your new car, meaning you’ll pay less sales tax on the new vehicle transaction.
This doesn’t apply in Alberta, where there’s no provincial sales tax as of this writing. Be sure to check the current status of this procedure in your province or territory before proceeding with a trade-in.
Don’t Forget the Paperwork
Before the loan and transaction can be considered closed, you’ll need to complete some paperwork with the lender to ensure the loan is properly concluded. You’ll also need to ensure ownership of the vehicle is transferred without showing any liens, or outstanding debt, in its records. If you sell your car through a dealership or a trusted partner such as CarGurus, you’ll get some help with completing these steps. If you go through with a private sale, you’ll find some lenders have different processes than others for transferring the title to the new owner, and you may need to coordinate with your lender and the private buyer’s lender to hand off the loan and the ownership.
Frequently Asked Questions (FAQs):
How will I know what my car is worth as a trade-in?
You can have your car appraised at a dealership or by another expert, such as the CarGurus Sell My Car feature.
Do I owe anything on my car?
You can find this out by checking the monthly statement for your car loan or by contacting your lender.
Can you sell a car on finance using a trade-in?
Yes, but you’ll need to work with your lender, complete some paperwork, and either work with a car buyer who can assist you with the process or pay off the outstanding loan before you attempt to sell the vehicle.
Are there tax benefits to trading in a car?
In most provinces and territories in Canada, you can save some sales tax by providing a trade-in when buying a car. The value of the vehicle you trade in is deducted from the taxable amount on your new car purchase.
Is it illegal to sell a car with a lien on it in Canada?
It’s not illegal to sell a car with a lien on it in Canada, but you will need to go through a few key steps to ensure the lien is cleared from the car either before or immediately after the ownership transfers.
What are the steps to transfer ownership of a financed car in Canada?
You’ll need to ensure the car loan is paid off and the lien on the vehicle is cleared before its ownership is transferred.
