Car loans are secured by the vehicle, meaning that the lender has the legal right to repossess the car if you do not make loan payments. The lender's legal right is expressed by having a lien on the car title, which acknowledges the lender's stake in the car. Selling a car with a lien on the title is a complicated process.
Difficulty Finding Buyer
A buyer will not purchase your car unless you can hand over a clear title, with no lien on it. Therefore, if your car still has a lien that you cannot get rid of, you will not be able to find a buyer. Even if you are planning to use the proceeds of the sale to pay off the car loan, some buyers will be wary of the process.
Pay Loan Difference
In order to get a clear title with no lien, you need to pay off your car loan first. The lender will then release the lien. If you owe more on your car than it is worth, the money you get from the seller will not pay off the loan. In this case, you must either pay the difference out-of-pocket or get an unsecured personal loan to pay off the lender.
Complete Sale at Branch
You cannot complete a sale on a car with a lien just anywhere. The buyer will likely need to meet you at one of the lender's branch offices. The lender will tell you the payoff amount and the buyer will make out a check to the lender for that amount and a check to you for the remainder of the purchase price. If the amount owed is more than the purchase price, the buyer will give the purchase price to the lender and you will pay the lender the remainder of the payoff amount. After the lender has the payoff amount, it will release the lien and sign the title over to the buyer.
Use Bill of Sale
The trickiest situation is when your lender does not have a branch office and you need the buyer's funds to pay off the loan. You cannot sign over the title until the loan has been paid off, but your buyer is unlikely to hand over money without getting the title immediately. In this situation, the best option is to go to your state's department of motor vehicles and create a bill of sale to get the buyer a temporary operating permit. The buyer then must wait until the lender releases the title to get the permit.
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