Should You Buy A Car That’s Under Finance?

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.

On this page:

• What does ‘under finance’ mean?
• Can you buy a car that’s under finance?
• How to check if a car has finance owing
• Should you buy a car if it’s under finance?
• How to buy a car with finance owing
• Other pre-purchase checks when buying a car
• How to find the right car with Jacaranda Finance

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What does ‘under finance’ mean?

‘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. 

Can you buy a car that’s under finance?

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. 

Why would you buy a car that’s under finance?

There are a few reasons why you might want to buy an encumbered vehicle instead of one with no finance owed:

• Cost Savings: Sometimes, cars under finance can be sold at a lower price as the seller is motivated to clear their outstanding loan quickly.
• Availability: The car you want may only be available from a seller who still has finance owing on it.
• Negotiation Leverage: You might have more room to negotiate the price if the seller is keen to offload the car and settle their loan.

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.

How to check if a car has finance owing

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:

Is it free to check if a car is under finance?

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! 

Should you buy a car if it’s under finance?

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:

Buying A Car Under Finance: Pros & Cons

Pros	Cons
Potential cost savings: you may get a lower price. Negotiation leverage: The seller may be motivated to sell quickly. Availability: Looking for encumbered cars can also open up more options in the market. Transparency: It's easy to verify loan status through a PPSR check.	Risk of repossession: If the loan isn't paid off, the car could be repossessed. Complex transaction: Involves additional steps to clear finance. Financial uncertainty: You’ll need to verify the exact loan amount and payoff process. Extra costs: it may incur costs for PPSR checks and additional paperwork.

What if the seller denies that there’s finance owing on the car?

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.

How to buy a car with finance owing

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:

1. Discuss it with the seller.

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.

2. Contact the lender for a letter of discharge.

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.

3. Agree on payment terms for the amount owing.

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:

• Make a direct payment yourself: You can pay the lender directly to settle the outstanding loan. This can be much faster and ensure the finance is cleared. You could arrange for the seller to pay you back, but this is optional.
• Make a payment plan yourself: Rather than a direct lump sum payment, you could also arrange to make a payment plan with the lender for the remaining finance owed. 
• Get the seller to settle the loan: The cheaper option for you (and probably the more appealing one) is to ask the seller to pay off the remaining balance. They could do this upfront or use the funds from the car’s sale.

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.

4. Obtain a release letter.

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.

5. Transfer the title.

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.

6. Complete the sale.

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.

7. Register the car in your name.

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.

8. Get insurance.

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.

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The car will then be yours!

Other pre-purchase checks when buying a car

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.

Sneak peek:

1. Research and preliminary checks
2. Vehicle inspection - exterior checks
3. Vehicle inspection - interior check
4. Vehicle inspection - under the hood
5. Test drive insights
6. Essential documentation
7. Negotiating and buying the car
8. Post-purchase considerations

How to find the right car with Jacaranda Finance

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.