Why you cannot just hand over the keys
When you finance a car, the lender registers a security interest against it on the Personal Property Securities Register. Until that interest is discharged, the lender has a claim over the vehicle no matter who is driving it. No legitimate buyer will complete a purchase without it being cleared, because the car could be repossessed out of their hands.
The payout figure, and why the date matters
Call your financier and ask for a payout letter. It states the exact amount required to close the loan and, critically, a date that figure is valid until. Interest accrues daily, so a letter from three weeks ago is not the number anyone will settle on. Ask for it early in the process and refresh it if things take longer than expected.
How settlement actually works
When you sell to a licensed dealer with finance owing, the money splits at settlement:
- The dealer pays the payout figure directly to your financier, not to you
- Any remaining balance is transferred to your account
- The financier discharges the security interest, usually within a few business days
You never handle the lender's portion, which is what protects both sides. Ask the dealer to confirm in writing that they will pay the financier directly, and keep the payout letter as your record of the figure.
If you owe more than the car is worth
This is called negative equity, and it is common on newer cars financed with little or no deposit. If your car is worth $22,000 and you owe $26,000, the $4,000 gap is yours to cover before the security can be released. You have three options:
- Pay the shortfall at settlement and close the loan cleanly
- Refinance the shortfall as a personal loan, which usually costs more in interest but keeps cash in your pocket
- Roll it into your next car loan, which some dealers will arrange. Be careful: this compounds the problem into the next vehicle
Getting multiple offers matters more than usual when you are in negative equity, because every extra dollar of offer reduces the shortfall you have to fund out of your own money.
Novated leases and balloon payments
A novated lease is between you, your employer and the leasing company, so the process runs through your lease provider rather than a standard payout letter. Contact them first and ask what a mid term payout looks like, since the residual and any fringe benefits tax treatment can change the figure materially.
If your loan has a balloon or residual payment at the end, that amount forms part of the payout figure. Sellers are frequently caught out by this, so read the payout letter carefully rather than working from your remaining repayments.
What to have ready
- Current payout letter with its expiry date
- Financier name, account number and their settlement details
- Registration papers in your name
- A recent PPSR check showing the registered interest
With those four items, a sale with finance owing takes no longer than one without.