Buying a car today is generally a straightforward process. Technological advances have made the car buying process relatively easy by making inventory viewable online, as well as car value and incident reports. With a few clicks you can review the entire accident history of a vehicle you’re interested in and make an informed buying decision.
Usually, the hardest part of the process is finding the right car for your budget. Although, buying an encumbered vehicle – a car subject to finance – makes the process slightly more complex and requires taking extra precautions.
Buying a financed vehicle is completely normal
People don’t usually think twice about buying a home that’s already subject to finance. However, it feels different buying a financed car. Perhaps because it’s not talked about as often. Still, it’s perfectly normal and even commonplace for Australians to buy a car that’s still under finance.
What happens to debt liability when a financed car is sold?
Like any loan, the borrower is financially liable for the debt on a car. However, cars are used as a security so if they sell the vehicle while owing back payments, the new owner can be subject to repossession. Missing payments get held against the car, not the person who originally took out the loan and missed the payments.
Buying a financed car makes you immediately liable for all outstanding monies owed, including late payments and applicable fees. If you get hit with a large amount of unexpected debt you can’t pay, you’ll lose the car.
To prevent these surprises, dealers and auction houses are required by law to provide proof of a clear title with every sale. However, private sellers aren’t held to those same standards. Buying a vehicle privately will save money, but it comes with higher risk. The biggest risk being the possibility of losing the car for payments the previous owner missed.
Buying a vehicle from a private party is risky
Although you’ll save transaction fees, buying a used car from a private party is risky. As a buyer, you need to do your research and make sure you’re not buying an encumbered vehicle that is behind on payments and at risk for repossession.
In other countries, like the U.S., the seller could get in trouble for selling a car without a clear title. However, in Australia, the legal responsibility is put on the buyer: the buyer is responsible for verifying that a car has a clear title. That’s why many people get their own car loan and buy from a dealership, even if it costs a little more in fees.
Although it’s the buyer’s responsibility, Australia’s PPSR system makes it easy to verify a clear title. The Personal Property Securities Register will tell you if the car you’re interested in has an outstanding loan or not. If the vehicle is attached to a loan, the system will tell you all about the loan and who holds it.
The PPSR system is extremely useful for protecting consumers. Experts actually recommend performing two checks with the PPSR system. The first check should be performed when you’ve decided you want to buy a specific car. The second check should be completed on the day of purchase right before you hand over the check or transfer the funds online. This second check ensures the seller didn’t take out a loan against the car at the last minute.
What to do if the seller needs your cash to pay off the loan
There’s always a possibility that the seller needs your cash from the sale to pay off their loan. Never just take their word that they’ll use your cash for that purpose. If they don’t pay off the loan, the debt and penalties will fall squarely on your shoulders. You need to take measures to make sure that loan gets paid.
If that’s the situation you’re facing, it’s a good idea to conduct the transaction where the loan is held. For example, if the bank holds the loan, conduct your sale transaction in the bank’s office so when you pay the seller, they can immediately pay off the loan. Also, get that agreement in writing.
Financed cars can be a great deal with due diligence
Buying a financed car can be a great way to get the car you want at a significantly lower cost. When all the paperwork is in order and you’re dealing with an honest seller, there’s nothing wrong with buying an encumbered vehicle.