KEY POINTS:
Ultimately, buying a car with a loan demands a certain level of trust from both buyer and seller.
Three proposed methods that we use
Use your gut. Watch for red flags.
You find the exact car you’re looking for. You negotiate down to the right price. You’re ready to transact. But… there’s a loan on the car.
Ultimately, when buying a car with an existing loan, there’s no “official” way to do this. There are ways to include 3rd parties to act as escrows, but ultimately, there needs to be a level of trust between buyer and seller.
Do not let this discourage you from buying the car. Just carry a healthy amount of skepticism as you shop (as you always should). Here are some proposed methods:
METHOD #1 – Buyer pays off loan
Buyer pays the loan amount directly to the bank, on the phone, with the seller on the call.
Buyer also pays seller the difference in sale price (if any)
Seller gives buyer the car and all of its keys
Buyer insures the car
Seller promises to give the title once title is received
Buyer and seller draft an agreement and notarize the exchange and its conditions
Potential problems:
Seller does not give buyer the title. Proceed to small claims court.
Buyer damages the car while in possession and wants to return the car.
METHOD #2 – Seller pays off loan
Seller pays off loan and waits for the title (or lien release) to arrive
Buyer pays a deposit to hold the car
Once title (or lien release) arrives, finish transaction
Potential problems:
Seller does not honor the buyer’s agreement and buyer waits for nothing
Seller may not have the funds to pay the loan off
Buyer goes a different route and leaves the deal
METHOD #3 – 3rd party mediator
Pay a dealer to middleman the exchange and, essentially, act as an escrow
Fundamentally, seller will “sell car to dealer” and buyer will “buy car from dealer” right away
Either (or both) buyer and seller pay dealer to middle man exchange (fees can range from $500-2000, depending on the dealer and size of loan/risk to the dealer)
Dealer can issue a temporary plate to drive on right away (in most states)
Buyer can even finance through dealer as an alternative method of payment
Potential problems:
Extra costs
Either buyer/seller feels fishy about including a 3rd party
Dealer’s own finances are a mess and they “float the title” (meaning, they use the funds from your car to pay off another car, essentially acting as a Ponzi scheme) and they don’t properly pay off your car
I have personally done any of the three methods. It all demands on the circumstances and situations. I’ve even bought cars, sight unseen, using these methods.
Trust your gut. If something seems too risky and the other party demands too much, be willing to walk away or pay that third party to mediate.
