So You Want To Sell An Encumbered Car?
- Oct 14, 2017
For most people, selling a car is easy. Just make sure it’s in drivable condition and put it up for sale on a website or through local ads. Simple.
And if the car isn’t in good condition, either sell it for cheap or fix it up first. If it’s not fixable, you head on to a scrap-dealer and see if they’ll take the car for parts. Again, not terribly difficult.
However there is one thing that can make selling a car particularly difficult: Not actually owning it.
When the car is part of a loan, either being paid off by one or used as security for one, then you don’t own it completely. Until the loan is settled, the car can legally be claimed by whoever the loan is with if payments aren’t made.
This is what’s known as “encumbrance”. Until the loan is settled, any outstanding amount is held against the vehicle, not the vehicle owner.
When Is A Car “Encumbered”, Exactly?
A car is encumbered if it’s used to secure any money that has yet to be repaid in full.
For example, if you get a secured loan from the bank to pay for the car, any outstanding amount on the loan is held against the vehicle. If you don’t pay, the bank can repossess the vehicle and sell it to recoup losses.
You might even use a car you already own outright to secure funds. Even though you previously owned the car, the vehicle is now encumbered until the funds are repaid.
A car is not encumbered if it’s not actually used to secure the money.
For example, if you redraw on your house mortgage to buy or pay off a car, the house is the security, not the vehicle.
Why Is Selling An Encumbered Car Difficult?
The real issue is in making sure that A) You have a plan to pay off the loan and remove the encumbrance and B) Convincing buyers to trust you.
See, when a buyer purchases an encumbered car, they’re at risk. If you default on your repayments, they can lose their new car. It’s understandable that most buyers are wary of vehicles that have an encumbrance on them.
What Are The Options?
There are several ways you can go about trying to sell an encumbered car:
Firstly, try to pay off the loan before you sell it. You can try to get an unsecured loan, get a cash advance on a credit card, draw money from a mortgage, etc.
Paying off the money owed on the loan the car is secured to will remove the encumbrance from the car and make selling it easier and risk-free for the buyer.
Secondly, you can pay off the remainder of the loan with the sale of the car. Obviously this will only be feasible is the price of the vehicle is equal to or greater than the amount owing on the loan.
To assure your potential buyer, and to ensure the encumbrance is removed immediately, you can even arrange to finish the transaction for the vehicle at your financial institution. This means the money can go straight from the buyer to the lender without worrying about time delays or forgetting payments. Everyone wins.
Lastly, if the sale of the car won’t cover the cost of the loan, you can use the sale towards the loan and arrange other methods to repay the rest.
If you’re planning to upgrade your car, some dealerships will help with financing to pay off the first car, and then help with the second. This is generally in their best interest, as they make most of their profits from car financing rather than actually selling cars.
Each option has its strengths and weaknesses. Drawing new money to repay the loan first keeps you in debt. Interest rates on cash advances, unsecured loans, and mortgages are fairly high, so you may end up paying more than you would have originally.
The second option of finishing the loan off with the sale of the vehicle is generally the safest. You wipe the slate clean. The only real downside is that it potentially leaves you with no money out of the transaction.
The last option is predictably the riskiest. You need to ensure you can pay off the amount of the loan owing, and convince the buyer you’re capable as well.
Are There Any Other Special Steps?
It’s not difficult to sell an encumbered car in the sense that you can still list it on any site or ad service like any other vehicle.
One of the most important things, besides arranging finances, is that you must be upfront about the status of the car.
What Happens If I Sell The Car And Default On The Loan?
There are two outcomes, depending on if you were honest with the buyer:
If you were honest, then the buyer loses their car and you arrange with the financial institute the penalty for defaulting on the loan. This is usually in the initial loan contract.
If you weren’t honest, the buyer loses their car, and then likely takes civil action against you for damages.
There are shades to either outcome, depending on many factors, but the take-home is that it’s important to be absolutely honest regarding the financial status of the vehicle at the time of sale.
I Used Loaned Money to Buy the Car, But I’m Not Sure If It’s Encumbered. How Do I Check?
As we said above, it’s possible to use owed money — like a home mortgage — to pay for a car without the car being encumbered. You might also have gotten the vehicle from a close friend or relative in good faith and not questioned it at the time.
If you’re unsure about the financial status of the car, you can get a cheap REV check through
A REV check is part of a PPSR report — basically a complete car history. It will tell you about any financial encumbrances related to the vehicle, whether it’s ever been stolen, and even if it’s been written-off. If you don’t perform this check, there’s a very good chance your potential buyer will — nobody wants to buy a dodgy car, and the easiest way to prevent it is through a cheap REV check.