Selling An Encumbered Vehicle

For most selling a car is a relatively straightforward process: make sure it’s in drivable condition and put it up for sale on a website or through local ads. Simple.

Car isn’t in good condition? Either sell it for cheap or fix it up first. Not fixable? Call your local scrap-dealer and see if they’ll take the car for parts. Again, simple.

The car has money owing on it?

Uh oh.

When a car is a security on loan – either the loan was taken out to buy the vehicle, or the car was used as collateral for something else — then the owner doesn’t own it. Until the loan is settled, the vehicle can legally be claimed by whoever lent the money.

This is what’s known as “financial encumbrance”. Until the loan is settled, any outstanding amount is held against the vehicle itself, not the vehicle owner.

So what does this mean for trying to sell it? Let’s take a look.


A car is encumbered when it’s used to secure any money that has been loaned and not yet repaid in full.

For example, you get a secured loan from the bank to pay for the car. You mae repayments for six months, then stop. Any outstanding amount on the loan is held against the vehicle. If you refuse to pay, the bank can repossess the vehicle and sell it to get their money back.

Keep in mind, a car is not encumbered if it’s not actually used to secure the money.

For example, you may redraw on your house mortgage to buy or pay off a car. In that case, it’s the house that’s the security, not the vehicle.

The Difficulty of Selling An Encumbered Vehicle

It’s not illegal to sell an encumbered vehicle, but ask yourself – would you buy a car that could be repossessed at a moment’s notice because somebody else didn’t pay a loan?

When someone purchases an encumbered car, they’re at risk. If you default on your repayments, they can lose their new car.

There are a few ways to go about trying to sell an encumbered car:

Try to pay off the loan before you sell it. You can consolidate the loan into a new, non-secured loan and free the encumbrance of the vehicle.

Agree to pay off the remainder of the loan with the sale of the car. Obviously, you need to make sure you’re selling the car for at least the amount left owing on it.

Lastly, if the sale of the car won’t cover the cost of the loan, you can use the sale towards the loan and arrange other methods to repay the rest. You’ll need to write an agreement with the buyer.

Used Loaned Money to Buy the Car, But Not Sure If It’s Encumbered? How Do I Check?

If you’re unsure about the financial status of the car, you can get a cheap REV check through It will tell you everything you need to know about your vehicle – and is a great way to research other cars you might be interested in buying!