How do you buy an encumbered car? |
Man holding clipboard and signing to buy a financed car

How do you buy a car that’s still under finance?

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Found your perfect car, but someone else still owes money on it? Learn about how you can buy a car that’s still under finance.

There is lots to consider when buying a car. Beyond making sure the car is in good under the hood, you need to find out if the car has any outstanding loans or financing.

To avoid getting yourself involved in a financial tug-of-war with a seller, we’ve detailed what to look out for when purchasing a car that hasn’t been paid off.

What does it mean when a car under finance?

If a car is under finance it means that it’s not completely paid for yet and is used as security for a loan. Secured car loans use the car as collateral in case the borrower defaults on the loan. If a borrower misses a payment, the bank will repossess the car.

Cars purchased with unsecured loans, credit cards or cash are not under finance because the buyer has paid for the car with their own money or with a loan that they’re personally held accountable for.

Why is it difficult to purchase a car with an outstanding debt on it?

Buying a car with money still owed on it is essentially the same process most people use to buy property. The buyer uses cash or a loan to pay the seller, who then uses the sale money to pay back their loan. However, unlike property, a secured car loan is attached to the car, not the owner.

The loan is secured by the car regardless of who owns it. If the seller doesn’t pay back the loan, then the buyer could be in for a nasty surprise. To make sure you’re not taking on a debt-riddled car, you need to take some extra steps to buying a car with a clear title.

How do you actually buy a car that has money owed on it?

Creating an open, honest environment is key to buying a car under finance. Here are some steps to take before buying a car under finance:

  • Ask the owner about financing. If the owner is open and honest about how the car is financed, it’s a good sign that they’re genuine when it comes to the sale. If they attempt to hide that money is owed on the car, it’s probably worth moving on.
  • Check with the DMV or search online. With the vehicle number and registration details, you can get a report on any vehicle and find out whether there is money owed on it or not. Ideally, the report will align with what the owner has told you.
  • Negotiate the sale process. The seller will most likely need your money to pay back their loan. However, you don’t want to hand your money over until the car is finance free. The solution is to finalize the sale in the office of the seller’s bank or lender so they can pay out the car loan as you give them the money.
  • Put the deal in a car escrow account. If you’re worried that the seller won’t pay off the loan once you purchase the vehicle, set up an car escrow account. If the seller doesn’t pay off the debt in a set amount of time, you’re money will be protected and returned under the terms and conditions of the escrow account.

Should I buy a car that’s financed?

There’s nothing wrong with buying a financed car, but the responsibility is on you to ensure that the car will have a clean title when all is said and done with the sale. If you find the right car, don’t be put off by existing finance — just make sure everything is out in the open.

Dealers are required to prove cars aren’t under any sort of financing, however, private sellers aren’t subject to the same regulations.

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Rates last updated November 13th, 2018

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