Can you trade in a car with finance owing?

Has your lifestyle changed, are you looking for an upgrade or have you come across an opportunity to sell your car that seems too good to pass up? There are many reasons why you might want to sell your car – but what happens when you still have finance owing on the vehicle?

Let’s break down some things you need to know about selling a car with an outstanding loan.

Trading in a car with finance owing – can I do it?

You can trade in your car to a dealership even if you have finance owing on the vehicle. You also have the option to sell privately with an outstanding car loan (as we will explain in more detail further down).

But if you have a car loan secured against the vehicle, which means the car is security for the loan and allows the lender to sell your car if you can’t make repayments, then you will likely need your lender’s permission before going ahead with any sale.

Whether you are thinking of trading in your car for an upgrade or a downgrade for something more cost-effective before the end of your loan term, it’s typically a good idea to be upfront with the dealer about the total amount you have yet to pay on the loan.

Once they know this amount and you agree on the trade-in value (which ideally would cover your outstanding loan), the dealership may be able to communicate with your lender directly as part of the terms of the trade-in to make arrangements for the payment of any outstanding finance.

One possible advantage of trading in a car with finance owing is that you could drive away in a different vehicle with a smaller loan or one with a lower interest rate.

However, a major risk is ending up financially worse off with a bigger loan and higher interest payments.

It’s important to talk to your lender before going ahead with a trade-in as they may be able to help explain your options.

What do I need to know before I sell my car?

If you are considering selling your car with finance owing, whether that be through a dealership or private sale, there are a few things worth considering first, such as:

  • How much do you owe on your car loan?
  • Are there any early break fees or other costs associated with ending the loan before the scheduled time frame?
  • Could you first pay down the existing loan before selling the car to allow the sale to go through with no debt attached?

Compare car loans

The table below displays a snapshot of car loans on Canstar’s database, with links to providers’ websites. Before committing to any particular car loan product, check upfront with the provider to confirm the details of the product and whether it meets your needs. The products displayed are based on a $20,000 loan paid over five years in NSW for a new car, sorted by the current advertised interest rate (lowest-highest), then by provider name (alphabetically). 

What are my other options for selling a car with finance owing?

While trading in your car might be the most suitable option for you, it’s also worth being aware of other options, including:

Option 1. Sell your car and use that money to pay off the loan in full

This option could be suitable when the sale of your car would cover the outstanding amount on your loan. You could confirm this by reviewing loan terms with your lender.

It’s important to inform the buyer if your car still has money owing on it, and also to tell your lender that you want to sell the vehicle. Every loan is different, so this option may not be available to you if the conditions of your loan do not allow the car to be sold while still under finance.

This option may not be available to those wanting to trade in their car so they can buy a new one.

Option 2. Refinance your car loan

To remove a lender’s encumbrance, or debt, tied to your car before you put it up for sale, one option could be to refinance your car loan.

Refinancing your loan, or replacing an existing debt with another debt under new terms, may help boost your savings and give you greater flexibility and control over your car loan. For you this could mean refinancing to a loan with a lower interest rate, longer loan term or from a secured to unsecured car loan (meaning you would be free to sell the car as it wouldn’t be tied to the loan as security). Bear in mind that unsecured car loans often attract higher interest rates than loans secured by a car or other asset, so it’s important to consider your options carefully.

If you do decide to refinance your car loan, it’s worth checking that any fees or higher interest rates do not offset potential savings or convenience – watch out for things like any early exit fees or application fees lenders may charge you for switching to a new loan.

Option 3. Pay off the car loan with your savings or a personal loan

One obvious way to make the sale of your car go a little more smoothly would be to sell it without any debt attached – there are a few ways you could do this.

Make the most of your savings

Utilising your savings and paying down your car loan could make the sale of your vehicle a bit easier.

Take out a personal loan to pay off the car loan

You could take out a personal loan that has an interest rate lower than the one you pay on your car loan and use the personal loan to pay the outstanding car loan balance.

Personal loans typically have fixed loan terms, meaning borrowers are required to repay the loan within a specific period of time. Before signing up to a personal loan, it could be a good idea to check in with the provider to confirm the fees and interest rates they will charge you, based on your particular circumstances.

This could be useful for people who have trouble paying debts on time, compared to a credit card where you are only required to repay the minimum amount each month.

Cover image source: oneinchpunch/

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This content was reviewed by Digital Editor Amanda Horswill and Sub Editor Tom Letts as part of our fact-checking process.

Ellie McLachlan is responsible for leading and breaking financial news on home loans, savings and much more. Ellie studied a Bachelor of Journalism and Arts at UQ and has worked at major metropolitan and regional news organisations.

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