Should I Pay Off My Car Before I Sell It?

Regardless if you sell your car to a dealership or private buyer, the process involves a lot of paperwork. Almost all dealerships will take your car even if you owe on it, but you'll have to make payoff arrangements with either the buyer or lender if you plan to sell privately. While paying off your car can lessen the amount of paperwork and preparation, it's not always the smartest decision.

If you have a loan attached to your car, a lender holds the title. You cannot legally sell a car if you do not own the title. That doesn’t mean you can’t sell your car at all, it just means you need to acquire the title first. The easiest method is to simply pay off the car. After you make your last payment, the bank will then mail you the title. You can also elect to arrange a payoff method with the bank. You can use the funds you get from the buyer to pay off the remaining portion of the loan and then give the loan to the buyer. Regardless of your method, you must pay off the remaining loan amount.

If you trade in your car, the lender will still want the loan paid off, but you don’t need to be involved in this. The dealership can flip your current loan over to your new car loan. This effectively puts you upside down on your car loan, which means you start out owing more than the car is worth. Since cars depreciate at a rate of 15 to 25 percent per year, according to Edmunds.com, you’re going to owe far more than the car is worth by the end of your loan. If you can pay off the car before you trade it in, do so. If you can’t, make sure you pay off the new loan before you buy a new car in the future. Otherwise, you may find yourself in a constant cycle of upside-down loans.

If the remaining portion of the loan exceeds an amount you can afford, it’s smarter to either sell the car privately and use the money to pay off the loan, or trade your car in and deal with an upside down loan. While an upside-down loan puts you at a disadvantage, defaulting on a new loan because you used the majority of your funds to pay for an old loan is a lot worse.

You may be able to find a dealership that will pay more for your car with a loan attached than if your car was paid off. For example, if you shop around, and most dealerships offer you a $2,000 credit for your car, but you insist that you need at least $2,500 to pay off the loan and an additional $1,000 towards a new car, you might get a dealer to bite. In addition, some dealers offer limited-time deals involving car loans, such as offering to pay off your loan and match that amount in cash back on a new car.