Buying a Used Car with an Outstanding Loan

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Purchasing a used car from a private party can save you money, since these sales typically come with less markup than you’d experience if you made the purchase from a dealer.
In some of these transactions, the private seller may still owe money on the loan originally used to purchase the vehicle. This means that the bank to which the loan is owed holds the car’s title, not the seller.

A situation like this can complicate your purchase. Since money is still owed on the car loan, the vehicle’s title cannot be directly transferred to you. If you want to receive the title, the seller must first pay off the loan and receive the vehicle title from the lender. At this point, the seller can take steps to transfer the car’s title to you.

Below are some tips to consider if you want to make your purchase of a vehicle with an outstanding lien a smooth and hassle-free experience.

1. Use Your State’s DMV Website to Run a Lien Search

Before making a purchase, check and see if the used car you’d like to acquire has an outstanding lien. Your state’s Department of Motor Vehicles website offers a tool that allows you to research a vehicle’s lienholder, but to use it, you’ll need the car’s vehicle identification number (VIN). You can request the car’s VIN from the seller.

2. Discuss Results of Your Lien Search with the Seller

If the seller has been honest, the results of your lien search should match the information the seller has provided to you. However, keep in mind that in some cases, the car’s lien may not have been transferred to the seller by the lender even though the loan has been paid in full.

If this has happened, the seller will need to provide proof of payment to the lender to receive the title. Make sure the seller is in possession of a clear title before completing your purchase.

3. Get the Seller to Pay Off the Outstanding Amount

If the seller still owes money on the vehicle being sold, it’s important to make sure this amount is fully paid off before you sign on the dotted line and complete your purchase. The reason for this is simple: If you purchase a vehicle with an outstanding lien, you won’t be able to take possession of the title unless you pay off the amount owed on the loan. This could wind up costing you much more than the negotiated purchase price of the vehicle.

If the seller agrees to pay off the outstanding amount, make sure that payment has been completed and the title has been transferred to the seller before finalizing your purchase. At the very least, get documentation from the lender indicating that the loan has been paid in full.

4. Create an Escrow Account to Manage the Purchase

Sometimes the seller needs time to pay off the outstanding debt. In situations like this, it makes sense to set up an escrow account to handle the purchase. An escrow service will assume the responsibility of overseeing the loan payments made by the seller to the lienholder.

The big advantage to using a service like this is that it eliminates the risk associated with the transaction. The escrow service won’t release your funds to the seller until all conditions of the sale have been met. The escrow service will also provide all the necessary paperwork and will deal directly with the lienholder to help ensure a smooth and swift title transfer.

The one drawback to using an escrow service is that doing so involves a fee. Fortunately, this fee is typically quite small. Some escrow companies charge roughly 1.5 percent of the vehicle’s sale price to car buyers who want to use their services.

5. Pay the Loan Balance Directly to the Lender

Another option is to pay the balance owed by the seller to the lender. To do so, you would need to write a check directly to the lender.

The best way to handle this transaction is to have it take place at the lender’s office. You will hand the lender the check, and the lender will turn over the vehicle’s title. Whatever surplus exists between the selling price and the amount owed to the lender will be paid to the seller.

Make a Used-Car Purchase That Could Save You Money

Purchasing a vehicle with an outstanding lien involves jumping through an extra hoop or two to complete the transaction.

However, in certain cases, sellers looking to transfer ownership of vehicles with outstanding liens are eager to make the transaction. This may make them more willing to negotiate on price, and if this is the case, you could realize tremendous savings on your vehicle purchase.

Shopping for a used car? Start your search with CARFAX Used Car Listings, where every car comes with a free CARFAX Vehicle History Report. Also, be sure to follow us on Facebook and Twitter.

By | 2018-02-13T20:51:19+00:00 January 31st, 2017|Car Buying|2 Comments


  1. Braden Bills February 28, 2017 at 12:50 pm - Reply

    I want to make sure that I get a good used car. It makes sense that I would want to use a loan! That way I can afford it now and be able to use it while I save up to pay it off later.

  2. Dorothy October 13, 2017 at 11:49 pm - Reply

    What if i already bought the vehicle but the seller never told me she had a loan on it. And dont want to pay the loan off

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