If you're looking to buy a used car that's still under finance (also called an encumbered car), you must understand how the buying process works to ensure you don't run into complications down the line.
With an encumbered car, the debt is attached to the vehicle itself, not the owner, so it can cause major problems if you buy a car still under finance.
Read our guide on what to look out for when purchasing an encumbered car and compare your finance options below.
An encumbered car is simply one that was purchased with a secured car loan with the vehicle held as security for that loan. It isn't necessarily a bad thing; in fact, many cars are financially encumbered. Your own car is considered encumbered if you purchased it with a secured car loan that you haven't completely repaid yet.
Secured car loans are attached to the vehicle. The lender gives the money to the buyer with the condition that if they fail to repay the loan, the lender can take ownership of the vehicle to recoup costs. It is perfectly legal to sell a car that is under finance, but you should always notify the buyer and arrange for the rest of the loan to be paid off before you sell it. As a car buyer, you're legally responsible for verifying whether a privately sold car has a "clear title" (no money owed) or the amount of any outstanding debt tied to it.
Cars purchased with unsecured loans, credit cards or cash are not encumbered because the buyer has paid for the car with their own money or with a loan that they are personally liable for.
Buying a car that's under finance is essentially the same process as buying a property. The buyer uses cash or a loan to pay the seller, who uses the sale money to pay back their loan. However, unlike property, a secured car loan is linked to the car, not the owner.
The loan is secured against the car regardless of who owns the vehicle. If the seller does not pay back the money owed, the car can still be seized even if it has been bought by someone else.
This makes the purchase slightly more complicated than if you were to buy an unencumbered, or free title, car.
To ensure that you're not taking on a debt-riddled vehicle, you need to take some extra steps to protect yourself. While the seller should notify you if the car is encumbered, you should always ask if a car is under finance before agreeing to buy it.
In a worst-case scenario, if you buy a car with an unsettled loan attached to it, the vehicle can legally be repossessed by the lender on default of repayments.
Buying an encumbered car is relatively straightforward and much the same as buying a normal car. There are just a couple of extra steps you'll need to take. These are:
There is nothing wrong with buying a financed car, but you need to take precautions and do a bit of due diligence before committing. The responsibility is on you to ensure that the car doesn't have any outstanding finance, or if it does, to make sure that the seller pays off the loan before you take ownership of the vehicle. If the car is particularly unusual, like a classic car or special edition and you simply must have it, the extra bit of effort will be worth it.
Dealers are obliged to prove that their cars aren't under any sort of financing contract and have much more to lose by misleading buyers. However, private sellers are not subject to the same regulations, so make sure you do the proper checks.
If you find the right car, don't be put off by existing finance. Just make sure everything is out in the open. Be wary of offers that seem too good to be true. And, if you like, use the fact that the car is encumbered to haggle a better deal.
Simplify Used Car Loan.
Simplify New Car Loan.
Aussies are paying up to 185.14% extra for vehicles compared to our American friends.
How to find the finance you need to purchase a brand-new BMW.
Want to buy a classic car but don't have the ready money? There are still financing options available for classic vehicles. Find out what loans you have to choose one and which one will work best for you.
If you're looking at purchasing a Tesla – Model S, Model X or Model 3 – this guide will show you how to choose a vehicle and make your purchase.
Read the guide on how to sell an encumbered vehicle to find out the extra steps involved.
Find out the extent of Australia's Tesla Supercharger network with our complete map of every charging station.
Need a new loan for your next Uber car? Find out what is on offer here.
Get funding for a new or used car, motorbike or caravan as well as access to a complimentary car-buying service with a Macquarie Car Loan.