A 2015 study found as many as 13% of used cars on the market were under finance. But what does this mean, and why does it matter when you’re buying a car?
This article will explain just that and how it can impact your choice of car.
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‘Under Finance’, also referred to as ‘finance owing’ or ‘encumbered’, means that a car still has an outstanding loan on it. In other words, the current owner hasn’t yet fully paid off their car loan, and the lender still retains a financial interest in the vehicle.
If that person were to default on the loan, the lender still has the right to repossess the vehicle.
This ordinarily wouldn’t cause any problems - if you’re currently repaying a car loan, then your vehicle is technically under finance, too. But it has implications for prospective buyers and sellers of second-hand cars, which we’ll get to shortly.
Yes, you absolutely can buy a car even if it’s still under finance. Buying encumbered cars is quite common, but it can come with some risks and can add a few extra steps to the car-buying process.
There are a few reasons why you might want to buy an encumbered vehicle instead of one with no finance owed:
If you’ve got your heart set on a particular car, then it can still be ok to buy it if the previous owner hasn’t paid it off yet. You’ll just need to take precautions and be aware of what can go wrong.
Whenever you’re buying a second-hand car, one of the very first things you should do is conduct a Personal Property Securities Register (PPSR) check. This is the primary way to check if a car is still under finance in Australia. The PPSR website can also help identify whether the vehicle has been listed as stolen or was written off in an accident.
To search a car’s finance status, you need only provide the Vehicle Identification Number (VIN) or chassis number.
Here’s what the PPSR does and doesn’t tell you:
Performing a PPSR check is not free, but it might as well be. As of now, the cost of a single PPSR check is around $2. This small fee can provide peace of mind by ensuring that the car is free from any financial encumbrances, so it’s worth parting with!
It’s entirely up to you if you want to buy a car under finance. As long as you understand it can present an extra financial burden if you don’t do your due diligence and that it can add a few extra steps to the car-buying process, then it could give you more wiggle room to snag a bargain.
We’ve summarised the pros and cons of buying a car under finance in the table below:
Pros
Cons
If a PPSR search reveals the car is still under finance, but the seller denies this, then this is a big red flag. They might not have been aware of it initially, but if they still insist they don’t owe any money on the car, then they may be willfully trying to deceive you.
In this case, it’s probably best to walk away from the deal and try to find another alternative.
There are some potential benefits to buying an encumbered vehicle, so if you decide to go down that route, there are a few things you need to do.
Assuming you’ve already done a PPSR check, the process for buying a car under finance looks something like this:
Have a conversation with the seller about the car’s financial situation to confirm the amount still owed on the loan. It’s ok if they don’t know the exact amount at the time, but they should be able to check with the lender.
It’s essential to check with both the seller and the PPSR website and establish a plan to pay off the remaining balance.
Next, reach out to the lender who holds the finance on the car, providing them with the car’s details and information about the owner. This is to verify the outstanding loan amount and to receive a letter of discharge, which should include a final payment figure and the date by which it needs to be paid.
You’ll need to come to an agreement with the car’s owner on how the outstanding finance will be settled. There are typically three main methods for doing this:
However, requesting the seller to pay off the remaining loan balance doesn’t guarantee they’ll actually do it, which is why you need to take the next step.
Once the original loan has been fully paid off, ask for a release letter from the seller’s lender. This document certifies that the lender no longer has any financial interest in the vehicle.
You’ll want to keep this letter for when you apply for your own car finance.
After confirming that the finance has been cleared with both the seller and the lender, the next step is to proceed with the title transfer.
Make sure all paperwork is correctly filled out and submitted to the relevant authorities to reflect the change of ownership.
You can now finalise the transaction with the seller. Take care to have all the necessary documents on hand, including the signed bill of sale, release letter from the lender, and any other paperwork required for the transfer of ownership.
After the purchase, register the car in your name with your state or territory’s motor vehicle registration authority. Provide all necessary documents and pay any applicable fees.
It’s highly recommended you get car insurance before you drive the thing. Some lenders will even make having comprehensive car insurance mandatory before they approve you for a car loan.
Choose a policy that covers your needs and ensure the car is insured from the moment you take possession.
The car will then be yours!
Don’t forget everything else on your checklist when buying a used car! Buying a used car is a complex process at the best of times, and the chances of purchasing a lemon are pretty high.
That same study from 2015 found nearly a quarter (22.2%) of used cars were hiding a potentially severe issue, and one in 10 had been written off at some point.
Even minor issues could cost you thousands of dollars in car repairs, so read our Used Car Buying Checklist for a comprehensive guide on what to look for and when.
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Whether you’ve already got a car in mind or you’re looking for pre-approval before you go shopping, Jacaranda Finance has you covered with our Car Loans of up to $25,000.
We offer pre-approvals on the same day you apply2, giving you the confidence to buy the right car without wasting time and going over budget.
Buy your next car on your own terms with a fast, flexible and secure Jacaranda Car Loan.
$3,000 - $25,000
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