Is it possible to sell a car if you are still making loan payments and the loan is not yet paid off?

This is a very common question with car buyers and owners.

The answer is yes, you can sell the car, but you must get enough money in the sale to pay off your loan, so that your bank can give you a “clear” title to give to the new buyer. This is where problems often arise. Let’s see how.

If you are upside down

If you are still paying on your loan, you still have an outstanding balance, which might be more than your car is actually worth. This means you are “upside down” and would need additional cash, after the sale, to fully pay off your loan. Loan companies want to be paid in full immediately after the sale. They won’t allow you to continue to make payments on a car you no longer have.

Be sure not to sell your car without know if you are upside down and knowing exactly how you still owe. That way you don’t get into the problem of selling your car and finding out that the money doesn’t cover your outstanding loan balance.

Even if you intend to sell your car, possibly because you can’t afford the high payments, and buy a cheaper car, you still have to pay off your old loan before you buy another car. And you can’t simply trade cars thinking it might lower your loan balance and payments.

If you are not upside down

If your loan balance is less than the outstanding balance on your loan, then there’s no problem. You get the money from the buyer, use part of the money to pay off your loan and get the title, and put the remainder of the money in your pocket — possibly as part of a down payment on another car.

Check with your bank or loan company to determine your current outstanding balance or “payoff.”

How does it work?

How do you sell a car that you are still have a loan on?

Here are the basic steps: Sell the car, use the money to pay off your car loan, get the car’s “clean” title from loan company or bank, give title to buyer, and buyer gets new title and tags from the local DMV office. Depending on the state, the buyer may pay sales tax.

Generally, a smart buyer will insist that he go with you to your bank so that he can write his check directly to the bank, have you add your additional cash if you are upside down, get the title immediately, have you sign over the title to him right then and there, and give him the car keys. That way, there are no delays and no mess. Nice and clean and quick.

Summary

So if you want to sell your car when you are still making payments, yes, it can be done. However, if you still owe more than your car is worth, it is much more difficult — and sometimes impossible.

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You may still be able to buy another car if you are upside down on your previous loan.

There are two ways to go about it.

One way to buy with an upside down loan
You could sell your old car but you will have to add extra cash to fully pay off your old loan. You’ll need to pay off your loan so that you can give a clear title to your buyer. However, coming up with extra cash might be a problem, especially if you are upside down by a large amount. For many people, this solution is not possible.

Let’s look at some other ways.

Another way to buy if you are upside down
You can trade your old car at a dealer and let the dealer pay off the old loan. Sounds easy, but there’s a catch. If your old car is not worth as much as the amount remaining on your old loan, the dealer takes the difference and adds it to the price of your new car. If you are upside down by a large amount, this can significantly raise the cost of your new car. In some cases, a dealer will not allow the entire amount to be rolled into a new loan, which means you must come up with some cash as a down payment.

When you roll part of an old loan into a new loan, it usually puts you right back into an upside down situation, which is usually worse than your old situation. It is a vicious cycle that you would be best to avoid.

The best way to get out of an upside down loan is to simply keep your old car, keep making payments, until you are no longer upside down. Then, you have the option to do anything you want.

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Here is how a car trade works. Car dealers buy your old car from you and give you credit toward the price of a new car. The trade-in credit is like a down payment and reduces the price of your new car, making your monthly payments smaller. The dealer then puts your old car on his used-car lot to sell, or he sends it to a dealer car auction where another dealer will buy it to put on his own used-car lot.

Dealers make a lot of profit on selling used cars they’ve taken as trade-in. They pay the trading customer a low wholesale price, and sell the car for a higher retail price. That’s how they make their money and stay in business.

It is to a dealer’s advantage to pay as little as possible to the trading customer. Therefore, smart customers will have already done research to determine the fair wholesale value of their trade-in vehicle.

Since dealers only pay wholesale value for trade vehicles, customers can make more money by selling the vehicle themselves, rather than trading it, although it’s more work.  The money from the sale can then be used as a down payment on a new vehicle, reducing payments even more than if they had traded. Smart sellers will have done their research to know the fair retail value of their car.

Where to find trade-in values and retail values? Online, you can use Kelley Blue Book as a good source of average car values. Just keep in mind that used car trade-in values are not absolute and can vary widely between dealers, different parts of the country, and a dealer’s interest in the vehicle. The values of used cars changes often, usually faster than any value guide can keep up.

What if you still owe money on your trade vehicle? Can you still trade it?

Yes, but watch out. If your loan payoff is less than your car is worth as a trade-in, the dealer will take your car, pay off your loan balance, and apply the remainder as a credit toward your new car. This remainder is your positive trade equity.

However, if you still owe more money than your car is worth as a trade-in, you are “upside down” and have negative trade equity. Although some dealers may not explain it to you, he’ll take your car, pay off your loan, and will add the negative equity back into the price of your new car, making it more expensive and making for higher payments, not lower payments. It’s called “rolling” part of your old loan into your new loan. It’s like you’ll be paying off two loans at once. Rolling over negative equity from an old car loan is almost guaranteed to put you into an immediate upside down situation with your new car.

Sometimes, if you have too much negative equity in an old loan, you may find it difficult to get a new loan.  Banks and loan companies don’t like to loan you more money than a car is worth. The only solution is to make a cash down payment to offset some or all of the negative equity.

The other part of getting a good deal with a trade-in is getting  a discounted price on the new car you are buying. Do your homework and get some online price quotes from services such as TrueCar. The quotes are easy and quick to get, so it pays to get multiple quotes and compare them for the best deals.

Don’t let a dealer tell you he’s giving you more than your old car is worth in a trade because you’re probably paying too much for your new car. The best deals come from getting a fair trade-in price on your old car along with a fair price on your new car.

The car trade-in process is usually simple and uncomplicated, but it can get tricky when you still owe money on your old car — especially if you owe more than the car is worth.

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