How to sell a car you don’t own

By Liz Pulliam Weston

Selling a car you don't own free and clear can be a challenge if you try to do it yourself and an expensive mistake if you go through a dealership. But it's a situation many sellers face.

Plus, plenty of people get a nasty shock when they prepare to sell: They owe more on the vehicles than they're worth.

"People often don't realize they're 'upside down' on their car," said Steve Nolan, spokesman for Cars.com. "They don't realize how much the value of their car has dropped since they bought it." (You can research used-car values at MSN Autos.)

This phenomenon has become a lot more common in recent years, said Philip Reed, consumer advice editor for auto information site Edmunds.com, for a number of reasons:

• New-car incentives are causing many vehicles to depreciate more quickly: the cheaper the new version, the less the old ones are worth.
• Fewer consumers are making the 20% down payments that could help protect them against this drop-off in value.
• The vast majority of buyers -- more than 80% -- opt for loans longer than four years. (The longer the loan, the longer you're likely to be upside down.)

As a result, more than one in four new-car buyers owes more on the vehicle they're trading in than it's worth, Edmunds.com figures show. The average amount of negative equity: nearly $3,900.

Bite the bullet if you can

Typically, the buyers roll that debt into their new loans, leaving them further upside-down on the new car -- and even more vulnerable if the vehicle should be stolen or totaled, since the amount they would receive from their insurers is far less than the loan.

"You could find yourself owing a lot of money," Reed said, "and having no car . . . to get to your job to pay for it."

So-called "GAP" insurance -- for "guaranteed auto protection" -- can help pay off an upside-down loan in these situations, but many drivers don't buy the coverage, Reed said. Besides, owing more money on a car than it's worth is a sign you've bought more vehicle than you can really afford.

"It's not a good thing for consumers to be doing," warned Reed, editor of the book "Strategies for Smart Car Buyers." "It's a matter of being able to live within your means."

That's why most experts advise delaying a car sale until you own the vehicle.

"People say they need to sell, but what they're really saying is 'I want this new car,'" Reed said. "Bite the bullet and pay it off . . . unless you're in a situation where you absolutely have to change cars, don't change cars."

Well, if you really must …

Of course, there are a few situations where you may feel pushed into selling a car you don't own:

• You've got a real lemon. In most cases, it costs less to fix and maintain an older car than it would to buy a new one. But occasionally a car is so unreliable -- and so unfixable -- that it poses a danger to you or your family.
• You're bursting at the seams. In a few instances -- like when you're driving a two-seater but expecting twins -- you really can't make do with your current car for a few more years.
• You really, truly can't afford the payments. This one isn't the slam-dunk it might seem, however.

Selling the car might help you retire a good chunk of the debt, but you'll still need to figure out how to pay off the rest of the loan -- and find some way to get to work.

That's why most people in this situation would be better off refinancing their existing loans, Reed said. You may be able to get a better interest rate or a longer term to lower your monthly payments. Check with your lender, credit union or an online lender like Capital One or eLoan.

If you must sell, you've got two options: sell it yourself or go through a dealer.

Selling it yourself

A private sale is often the best choice, since you'll get a lot more for the car than if you trade it in at a dealership. But it can be a lot of work -- and kind of tricky to pull off.

You first need to:

• Check with your state's Department of Motor Vehicles (DMV) to get all the required paperwork and procedures for transferring ownership of your car.
• Check with your lender to find out its procedures on how to get the lien released on your vehicle.

A lien is a kind of legal wheel-lock that lenders put on financed vehicles. Until the lien is released, the vehicle can't be transferred to a new owner.

Most lenders will want you to pay off the loan in full before they release the lien, which is a problem if you need the buyer's money to pay off your debt. Your problem deepens if you need extra cash on top of the buyer's payment to retire the loan.

Meanwhile, your buyer understandably may be reluctant to hand you a wad of cash if you don't have the title in your possession.

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