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How do you buy a car that’s still under finance?
What to do when your dream car has a loan on it.
Buying a car that someone hasn’t paid off isn’t impossible. But you’ll need to take some extra steps to make sure that title is clear. Otherwise, you could be responsible for more debt than you bargained.
What does it mean when a car is under finance?
If a car is under finance it means that the current owner hasn’t completely paid off a secured car 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.
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Why is it hard to buy a car with a loan on it?
It can be hard to buy a car with a loan on it because the loan is attached to the car, not the owner. In other words, whoever owns the car is responsible for paying off the loan.
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 can I buy a car with a loan 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 a car escrow account. If the seller doesn’t pay off the debt in a set amount of time, your money will be protected and returned under the terms and conditions of the escrow account.
Should I buy a car that’s under financing?
There’s nothing wrong with buying a financed car, but the responsibility is on you to make sure 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.
Bottom line
It’s possible to buy a car that the owner hasn’t already paid off yet. But you’ll need to make sure that you aren’t signing up for more debt than you bargained for by making sure the title is free.
Not worth the effort? Check out our car loans page to learn about your other financing options.
Frequently asked questions
Can I trade in a car that still has money owed on it?
You can, but if you trade it in for less of a value then what’s owed on the loan, you’ll be taking a loss.
What should I do before selling my car that has an unpaid debt on it?
You should notify the finance company and figure out how much is still owed on the vehicle, plus any fees, so when you sell it you can clear your debt completely. You can learn more about how this works in our guide to selling a car under finance.
Do I still owe money on a car that’s been repossessed?
You may. Check with the lender if there’s a deficiency balance or any other fees before those debts cause further damage to your credit score.
Image source: Shutterstock
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