When buying a second-hand car, it's important to remember that some vehicles could be encumbered - meaning they've been bought on loan with financing still owing. To ensure you're not left high and dry after you make the purchase, always buy from a reputable dealer who will disclose any potential encumbrances.
But if you do choose to buy privately, make sure to take extra steps such as looking up PPSR information and fully screening the seller before committing.
Can you buy a car with money still owed on it?
The short answer is yes, but there is an inherent risk involved.
When you're purchasing a car, it's important to think about the car's financial status. If the car was bought on finance or loan and the payments haven't been completed, there could be money still owing. Regardless of who now owns the car, the financial institution would still have security interests in the vehicle.
So, if the car loan is not paid in full and the finance company decides to repossess the car, the lender will have a legal right to do so. This means you will be out of pocket, having paid for a car that the finance company now owns. And while this won't be a legal or financial obligation of yours, you still won't have a car to show for it.
Therefore, it's important to do your due diligence when buying a financed car with money still owed on it.
How to buy a car with finance owing
The best way to buy a car with finance owing is to go through a reputable dealership. Reputable dealers will disclose financial encumbrances when selling a car and will offer a warranty on the vehicle. That way, you can rest assured that your purchase will not be affected by any outstanding loans or financing.
If you decide to purchase a second-hand vehicle by private sale, the onus is on you to ensure that the car is free of any debt or finance. You can do this by looking up the Personal Property Securities Register (PPSR) information for the car. This will tell you if any finance company holds an interest in the vehicle, and if so, to whom it's registered.
Next, you should vet the seller. Ask for proof of ownership, such as a registration document or a bill of sale. If they can't provide one, it could be a sign that the car is stolen. That is why you should check the car’s vehicle identification number (VIN) and registration number to ensure it matches the paperwork from the seller. If you don't take proper precautions and buy it without properly checking, you may find yourself in the unfortunate situation of having your vehicle seized.
Finally, if you're still keen to purchase the vehicle, make sure to get a mechanical inspection before committing yourself. This will help you determine whether the car is up to scratch and if there are any hidden problems that could be uncovered after the sale.
What happens if you buy a car that still has finance owing?
As previously mentioned, if you buy a car with money still owed on it, the finance company may repossess the vehicle and leave you out of pocket. As such, it's important to be aware of the risks involved before committing yourself.
However, there is a plus side.
Purchasing a car from a private seller can often bring about successful bargaining opportunities. If the seller is in a hurry to sell the car and you are aware that there is money still owing on the loan, you may be able to negotiate a better price for the vehicle. Private sellers will often be willing to offer a lower price if they can walk away from the transaction without having to pay off any outstanding loans.
What are my options for buying an encumbered car?
Get a dated payout quote from the finance company
If you're buying a car with money still owing, you can call up the finance provider and ask for a dated payout quote for the outstanding finance amount. This will give you a clear indication of how much must be paid in order to clear any existing encumbrances on the vehicle.
Request that the seller pays off any outstanding debt before you commit to buying the car
This will ensure that there are no financial encumbrances attached to the vehicle so that you can purchase it with confidence. It's always worth confirming with the PPSR information to assure that payments have been made so you don't risk introducing any extra cost into buying your vehicle.
Organize a payment plan with the seller to pay off the debt in full
This option would require you to pay off the outstanding balance in full before taking ownership of the car. You would need to work out a payment plan with the seller and agree on a timeline for repayment.
If no outstanding finance was declared
If the seller doesn't declare any outstanding finance, but you discover it through the PPSR, be very wary about buying the car. It may be a sign that the seller is trying to pass the responsibility of paying off the debt onto you, so it's best to ask them to pay off any finance or money owed and provide proof of payment before agreeing to purchase the car. Or avoid the purchase altogether.
What are the risks involved?
If you are wondering, "What happens if you buy an encumbered vehicle?" when it comes to the risks involved, the answer is, it varies.
Firstly, if the seller fails to pay off their loan prior to you taking ownership of the car, you may find yourself liable for the debt.
If the finance company repossesses the vehicle, you won't be able to recover any money that you have already paid for it, as the finance company has the first claim on the car.
As you can see, it is vitally important to do your research and properly vet both the car and the seller before committing to buying. Although there are financial risks involved, you may be able to negotiate a better price for the car if the vehicle still has active finance. Just make sure to exercise caution and take all necessary steps to protect yourself from any potential liabilities or financial losses.
No one wants to be stuck with a financial burden they didn't sign up for. As such, we recommend not pinning all your hopes on buying a particular automobile if it has finance still owing. Instead, shop around and research other suitable vehicles. While it is possible to use a car with finance attached as a bargaining chip, there are plenty of great vehicles out there just waiting to be discovered by you if you are prepared to do your research.
At Driva, we are taking the hassles and guesswork out of shopping around for the best loan options, from business car finance to EVs we have you covered. We understand that each customer has their own unique needs, so our smart match algorithm works by reviewing your profile to pre-qualify you for the best rates on offer. Not only that but with 100% rate and fee transparency we make sure you are in complete control - allowing you to make your choice with confidence.
Additionally, our secure process checks your online application against 1,000+ lender policies before it's shared with a lender; helping to ensure your credit score remains intact. With Driva, we are empowering you to shop smarter and find the right used car loan that meets all of your needs.