How To Sell a Financed Car in Canada

Car financing often lasts five or more years, so it’s not uncommon for your lifestyle to change and find yourself needing (or wanting ) a newer vehicle. But you’re already locked into a financing contract and can’t get out of it, right? Not true. You can sell a financed car in Canada if you adhere to some key steps.

Below, we outline how to sell a financed car in Canada to help guide you along your path to selling your current vehicle so you can secure a used or new car.

What Is the Penalty for Selling a Financed Car?

When considering selling a financed car, you must understand the potential penalties you may face. While it may seem straightforward, you must keep a few things in mind.

First and foremost, if you sell a car with an outstanding loan balance, you must pay off that balance before you can transfer ownership to a buyer. This means you must come up with the funds to pay off the loan, either through the sale of the car or other means.

Your lender may also charge penalties for selling a financed car. These penalties can vary depending on your loan agreement and the lender, but they could include loan prepayment penalties or costs associated with obtaining a lien discharge.

Prepayment penalties are fees lenders charge when you pay off a loan early and compensate the lender for the interest they would have earned if you continued making loan payments. The penalty amount will depend on your loan agreement, but it can be significant.

Another potential penalty you may face is the cost of obtaining a lien discharge. When you use an auto loan to purchase a car, the lender typically places a lien on the vehicle, which gives the lender the right to repossess the car if you default on your loan payments. When you sell the vehicle, you must obtain a lien discharge showing you paid off the loan and the lender released the lien. Some lenders will charge for this service.

Reviewing your loan agreement carefully is important to understand what penalties you may incur. Contact your lender for clarification if you're unsure about your loan terms.

How Can You Sell a Financed Car in Canada?

When you choose to sell a financed car, it can seem like an uphill battle. However, it’s not impossibly difficult — it simply takes planning or some flexibility. When selling a financed car in Canada, you have three main options: sell it privately, sell or trade it to a dealership, or sell or trade it to an online automotive retailer.

Let’s take a deeper look at each option.

Selling a Financed Car Privately

A private sale involves a fair amount of work. You have to prepare the vehicle for sale, get all the financials in order, perform any necessary repairs, have it cleaned, handle the marketing, field phone calls, and deal with buyers that come for test drives. Some sellers may enjoy this process, but it’s a hassle for others.

However, selling a vehicle privately is generally where you’ll get the highest price for the vehicle. Remember, since you still owe money on this vehicle, some buyers may be turned off by the additional steps and time it may take to complete the sale. Most buyers expect you to have paid off any outstanding balance on the vehicle loan and have a clean title.

If you don’t have a clean title, you’ll need to arrange something with the buyer where they pay you, then you pay off the loan and give the clean title to the buyer when it arrives. This can be a time-consuming process and a headache a buyer may not be willing to endure.

Sell or Trade it to a Dealership

Much of a dealership’s used-car inventory comes from trade-in vehicles or those they purchase from private owners. If you want to upgrade your vehicle, you can clean up your vehicle, head to the dealership, and speak to a used car manager about trading your vehicle in on something newer or better suits your needs.

If you’re not looking to upgrade your vehicle, some dealerships may be willing to purchase your vehicle outright. Not every dealership will offer this, and the number of dealers offering this option will vary based on used-vehicle supply and demand.

Remember that the dealership is there to profit, so expect to receive an offer that’s a bit below retail. When the dealership calculates its offer price, it will also consider reconditioning costs, so you could end up with a lower-than-expected trade-in value if your vehicle has some hidden mechanical or visual flaws you were unaware of.

This dealership will also have overhead to consider, such as the building and property it will use to display and sell the vehicle. This can further impact the offer you’ll receive.

Sell or Trade it to an Online Automotive Retailer

Online automotive retailers like Clutch have popped up to give car buyers some reprieve from the traditional hassle of going to the local car dealership. They can also help car sellers, as they take vehicles in on trade and regularly purchase vehicles directly from private sellers.

Because these online retailers also typically have lower overhead than traditional dealers, they can often offer more on your trade-in vehicle or when they offer to purchase it. Plus, if you work with the folks at Clutch, we’ll come to you and pick up your vehicle. No need to set foot in a dealership for a valuation.

At Clutch, you can also get a firm trade-in offer or selling price right online.

What is Positive Equity?

Understanding equity is an important part of selling a financed car in Canada, as this tells you whether or not selling it even makes financial sense.

Positive equity is when the current value of an asset is higher than the amount of debt that is owed on that asset. In the case of car loans, positive equity is when the value of the car is higher than the outstanding loan amount.

Many factors can influence whether or not you have positive equity in your car, but one of the most important pieces is the car’s initial purchase price. You may have negative equity from the start if you purchased a vehicle priced higher than its market value. However, if you bought a car below market price, you may have positive equity from the beginning.

Another influential factor in your car's equity is your down payment amount. A large enough down payment may give you positive equity right away. On the flip side, a small down payment or no down payment often leaves you with negative equity, which we’ll cover next.

Positive equity in your car can give you more financial freedom and flexibility. An example of this flexibility is if you need to sell your car for any reason. You can sell the car for more than the loan balance with positive equity. This means you can pay off the loan and pocket any leftover cash from the sale. This could be especially helpful if you must sell your car quickly to cover an emergency.

What is Negative Equity?

We’ve looked at positive equity, so what is negative equity? Logically enough, negative equity is when the value of your car is lower than the outstanding loan amount. If you sell a vehicle with negative equity, you will often still owe money on the loan — unless you find someone willing to pay more than the vehicle is worth.

Negative equity — often called being upside-down on the loan or underwater — can make selling a financed car more challenging, as you must make up the difference between the sale price and the outstanding loan balance from your pocket.

You may have one option if you have negative equity and can't find a private buyer to pay more than the vehicle is worth. You may be able to trade the upside-down vehicle for another and apply the negative equity to the loan on the new vehicle. This is generally not a great idea, as this potentially adds even more negative equity to your new vehicle, which could increase your monthly payments.

How Should You Prepare Your Financed Car for Sale?

When you decide to sell your financed car, you’ll want to follow a few tips to ensure you get top dollar for it. Here are a few ways to ensure this.

Step 1: Clean and Detail the Car

Always ensure the vehicle is thoroughly cleaned and detailed before taking any photos or listing it for sale. This helps it look its best and attract potential buyers and more competing offers.

Step 2: Address Any Issues

Over the years, vehicles can develop small mechanical and visual flaws we can overlook as the owner. However, a potential buyer may not be willing to overlook these and can use them as negotiation points. If your vehicle has any issues, such as scratches or mechanical problems, address them before listing it for sale. This can help you get a better offer for the car and avoid any potentially sale-killing surprises for a prospective buyer.

Step 3: Get a Vehicle History Report

Buyers will feel far more confident paying top dollar for your financed car if they can verify it has no red flags in its history. This is where a vehicle history report helps. These reports from places like CARFAX give potential buyers important information about the car, such as accident history, maintenance records, and ownership history.

A vehicle with a clean vehicle history report will often sell more quickly and at a higher price.

What is an Appropriate Price for Your Financed Car?

When selling a financed car, setting the right price is key to finding a buyer quickly. Here’s how to determine how much to sell your financed car for.

Tip 1: Conduct Research

Kick things off by researching the prices of similar cars in your area. This helps you understand your car’s value and what you should be asking for it. You can also find private party values for your vehicle through sites like Car Value Guide or Canadian Black Book.

Tip 2: Check the Payoff Amount

The last thing you want to do is agree to sell your financed car for less than the payoff value and run into issues getting the title. So, contact the lender and request an official payoff amount. This ensures you know exactly what you’ll need to pay the loan off and receive the title.

Tip 3: Consider your Car’s Condition

Your car’s condition will play a significant role in its value. Find all the flaws you can and honestly assess how they impact its value, then adjust your price accordingly.

Tip 4: Be Open to Negotiation

Buyers are always looking for the best possible price for their next vehicle, and you must remain open to these negotiations. Now that you’ve spent time finding the market value for your vehicle, figure out the lowest price you will take. With a financed car, this will generally be the payoff plus whatever money extra money you need to secure a new vehicle.

Look at your goals for selling your vehicle to determine your lowest price.

How Do You Secure Payment for Your Financed Car?

You’ve finally found a buyer and agreed on a selling price. Now, how do you ensure you receive the payment? Here are some tips for getting paid for your financed car.

Tip 1: Use a Secure Payment Method

The old adage “cash is king” is no longer valid in the digital age. It’s too easy to lose cash or, worse yet, have it stolen, so avoid accepting cash for your financed car. Also, it may be difficult for a buyer to put together the cash needed to buy a higher-priced car. Also, avoid personal cheques as payment because the buyer can easily place a stop payment on the cheque or write you a bad cheque.

Instead of using these outdated payment methods, use a secure payment, such as a bank draft or wire transfer.

Tip 2: Verify Payment Before Transferring Ownership

Always verify the payment has gone through and posted to your account before transferring ownership of the car. This can help you avoid any fraudulent transactions.

Sell Your Financed Car to Clutch Without Paying It Off

Generally, you cannot sell a financed vehicle without paying it off because you need to pay off any remaining balance on the car loan to secure the title and release the lender’s lien. There is one way around all this, and Clutch, Canada’s premier online automotive retailer, can help.

With Clutch, you can sell your vehicle directly to us or trade it for a quality used vehicle without paying it off. Simply get an online trade-in or sale price offer for your vehicle and confirm the amount will satisfy the loan balance. If so, sell the vehicle directly to Clutch, and we’ll pay off the loan for you. Whatever is leftover from paying off the loan balance will come to you as a cheque you can put toward your next car or anything else you’d like.

And if you trade your vehicle for a used Clutch vehicle, you can rest assured you’re getting a quality car. Every Clutch vehicle endures a 210-point inspection and reconditioning process and gets an optional 3-month or 6,000-km warranty. You’ll also get an optional 10-day or 750-km test-own period. If you don’t love your Clutch vehicle, you can return it for a refund or exchange it for another vehicle.

On top of all this, our car-buying and -selling processes are 100% online, so you’ll never have to set foot in a dealership.