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How to Buy a Used Car with a Loan Balance

By | Published June 27, 2012

Many people ask us here on CarBuyingTips.com, "How do you buy a used car from someone who still owes money to the bank for the car loan, and how do you transfer the title to your name?" You just agreed to buy a used Honda Accord from a seller on eBay Motors or Craigslist for $6000, then you learn the seller still owes $3000 on the car loan. What do you do now? Who really has the title and how do you get it and be sure the loan gets paid off? Here's what you need to consider.

This type of transaction seems puzzling and complex to people, but it's really quite simple, with 2 minor hurdles to overcome:

Hurdle #1: The Bank Holds Your Title When You Finance a Car

When you buy a new car and finance it, you legally own your car, your name is on the title and registration, but maybe this slipped your mind: the bank is holding the title in their possession! Remember, you don't have the title.

The lender is listed on the front of the title as a lien holder. They hold the title so you can't sell the car until you pay off your car loan. Vehicle titles are electronic when held by the bank and must be printed once the loan is paid off.

Hurdle #2: The Bank Delivers the Title to the Current Owner

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The second slight hurdle to overcome is the lender has a business relationship with the person who is selling you the car. That person is the bank's customer. The bank will never send you the title directly, even if you provide the check to pay off the car, because you are not the borrower in this loan.

Once the loan is paid off and the bank satisfied, about a week later they send the clear title to their customer free of liens, with "Lien Satisfied" stamped on the front of the title. Now the seller legally owns their car without encumbrances.

I've successfully negotiated these waters when helping friends sell their used cars with outstanding loan balances. We have developed these outline steps below and they do work. Before you pay off a car loan with a lump sum payment, you need to get a "payoff figure" from the bank which is good usually for 10 days. After 10 days, you'll have to pay more as the interest is accruing.

How to Keep the Seller Accountable When you Pay

When you buy that used car, you're probably nervous about giving the seller all this money and what if she does not pay off the bank? This is why you must keep sellers accountable and make payment directly to the bank, not the seller. Make sure that lender is paid in full, only then are you assured that the lien is satisfied. It's too risky to give all the money to the seller. What if they get robbed, scammed, have a medical emergency, or otherwise misappropriate the funds and never make it to the bank to pay off the car loan? It's like helping out poor people, you never give them cash, you instead buy them food or pay an electric bill on their behalf, and it's all about accountability. When paying the bank off, if there are funds left after satisfying the loan, you can pay leftover amounts to the seller. The seller could theoretically still scam you and not deliver the car, but at least he did not get your cash directly.

Be sure to download our free Used Car Bill Of Sale Spreadsheet from our free download section, to use as your invoice, and for DMV supporting paperwork.

Once the bank is paid off they send a clean title to the seller of the car. The seller is now obligated to deliver that title to you in person if you are local, or by FedEx. I only recommend FedEx, not the postal service, get a tracking number and follow progress of the FedEx delivery online. Use second day delivery to save money. Once you get the title visit the DMV and have it put into your name. Here's a summary of our steps for you to take when buying a used car with an outstanding loan balance:

  1. If the seller still owes money, get a certified check payable to lender. Any leftover funds go to the seller
  2. Use our bill of sale signed by you and the seller
  3. Send payment to lender with loan account number on it to pay off the car loan
  4. After a week the lender sends the title to the seller (not to you)
  5. Seller signs title over to you, delivers to you
  6. Bring title and bill of sale to DMV, transfer title to your name, life is good

This should be smooth sailing for you. Good luck out there!

Author Jeff Ostroff

About The Author: Jeff Ostroff is a consumer advocate, Founding Editor and CEO of CarBuyingTips.com overseeing a team of expert authors. For over 17 years, he's been the recognized authority on car buying, leasing, used cars and financing. He developed sophisticated spreadsheet tools to help consumers negotiate on a level playing field. He is a widely sought out guru, cited by the press for his expertise in savvy car buying and preventing consumer scams. Jeff has been quoted in CNN, Bloomberg, MSNBC, Wall street Journal, Consumer Reports, NY Times, Reader's Digest, and many live call in radio shows. He has covered the automotive space since 1997. Jeff also has extensive experience and expertise in selling used cars for clients on eBay and Craigslist. Connect with Jeff via Email, Twitter or on Google+.

CarBuyingTips.com has affiliate referral relationships with multiple web sites. This means that for many of the links you see on this site, we are paid referral fees for leads generated from visitors that click on links or fill out forms on this site. In some cases we are paid a commission for a purchase made on a site that is linked to from CarBuyingTips.com. Please view our advertising policy page for more information.