Buying a car with finance owing

2 August 2023 By: Byron Mathioudakis

When buying a vehicle through a private sale, checking if it has an outstanding loan against it is just as important as checking that it's mechanically sound.

Failing to check if the used car you're buying through a private sale is still under finance is a critical check that many buyers miss, yet it's estimated that 90 per cent of all car sales in Australia are bought with finance. About 40 per cent of those are organised through dealers and the remaining proportion through car loans, personal loans, drawing down equity on a mortgage or with a credit card.

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Some of those loans will be secured by the vehicle, with buyers bearing the risk that if the loan is not repaid, the vehicle can be repossessed.

If that vehicle is then on-sold with the loan still attached, the new owner can find themselves with an unexpected problem on their hands.

“A lot of people buy on impulse,” says Nicky Fox, manager of RAC Member Finance, which provides personal loans, car loans and other finance products.

“Rushing in without checking can sometimes be your downfall and where things go wrong. If you don't take the extra step to ensure things are as they should be, you can pay the price down the track.”

How big is the risk?

Fortunately, research conducted before the latest spike of interest rate rises estimated that while the vast majority of vehicle purchases included some form of finance, fewer than one in 100 loans was expected to fall into arrears.

Studies of how people borrow money show that people tend to prioritise staying up to date on car repayments (whether personal loans or through a dealership) compared to other forms of credit.

Research by the University of Sydney suggests people will stop paying electricity bills, credit cards, or buy-now, pay-later debts before they miss a repayment for a car loan. But as financial stress climbs, that risk of default is also rising.

Credit bureau Illion estimates the risk to Australian consumers of default has grown 11 per cent in the past year, with credit stress showing up in an increase in missed credit payments, lower rates of insurance taken out by consumers, and falling rates of household savings.

It means the risk that a vehicle for sale has an outstanding loan has increased in the past year. At the same time, buyers are more likely than ever to go outside a dealer to purchase a used car, given this can be a cheaper option.

Around half the used cars sold each year are traded on the private market. In WA, there are three times as many private-to-private sales of used vehicles as there are new cars sold. That creates a lot of opportunity for naïve buyers or deceptive sellers to trade a vehicle that is the subject of an unpaid debt.

What are the rules?

Not all vehicles with an outstanding loan can be sold without the buyer being notified. In Western Australia, licensed car dealers can only sell cars that have no money owing on them, which should provide buyers confidence that the vehicle they want is free from encumbrances.

When buying privately, however, there can be greater risks.

Under Australian Consumer Law, sellers are supposed to guarantee that they have the right to sell goods (with clear title) unless they tell the consumer otherwise, but it is still critical to double-check.

By law, if a car is used as security for a loan, and the loan is unpaid, the vehicle can be repossessed from a new buyer, even if they have purchased it and transferred the ownership. That is because the right to repossess the vehicle and sell it to pay out the remaining loan is attached to the car itself, not the previous owner.

Once repossessed, the vehicle is likely to be sold at auction by a lender seeking to recover their costs, often with little or nothing left for the unsuspecting buyer. That means the buyer might be left with no car and no money refunded regardless of how much they paid the original owner. Buyers looking privately for a used car therefore need to be wary.

“People should consider where the car is being advertised,” RAC’s Nicky Fox says, including whether it is on a secure and reputable car sales site, via a licensed dealer, or on sites with limited protection for buyers like social media trading posts.

“Are you purchasing or inspecting the vehicle from the same address that the vehicle is registered to?

“Get proof of ownership from the seller. Do they have a copy of the most recent registration document?”

If there is a loan outstanding, you can request that the seller pays off the loan before you go ahead with the purchase — checking PPSR again before you transfer any funds — or you can proceed with the purchase with caution.

You should request a written payout letter from the lender that indicates the exact amount owing and organise to pay that amount to the financier with the residual amount to the seller. Depending on how you are paying for the car, this might be able to be done through your bank to give you additional confidence that the funds end up in the correct place.

“And at the time of exchange, it is crucial that funds are not transferred before the vehicle is collected as this may put you at risk of losing your money and not receiving the vehicle,” Nicky says.

“There are options available to transfer funds or make payment at the time you collect the vehicle, and you should request a receipt for the funds.”

How can buyers protect themselves?

For any buyer in the market for a used car, doing some thorough research before committing to a purchase can help reduce the risk.

Nicky says there can be a greater risk of buying an encumbered vehicle in situations where the price seems too good to be true.

“Do your research around the make and model and vehicles with similar kilometres. Is the price realistic compared to others for sale and if the price is lower than others advertised, query this with the seller — why the lower price?”

She also recommends talking to the seller to understand the vehicle’s history, including asking direct questions to understand the background to the sale.

“For example, ask how long they have owned the vehicle. Does the vehicle have a service history with a dealership or auto service centre? Has the vehicle, while they’ve owned it, been in any accidents?”

The most important step, she says, is to complete a low-cost check on the Personal Properties Securities Register (PPSR), which can help shine a light on the past ownership of the car.

A PPSR search checks the vehicle identification number (VIN), a unique, 17-character identifier located in the owner’s manual or stamped on the driver’s side door. This will identify if the car is a repairable write-off, show if it has been reported stolen, and confirm whether it is free of outstanding debts. Just make sure you go to the government PPSR website.

The search will show whether the vehicle has a security interest registered against it — that it has been used as collateral in a loan — but it can’t tell you the amount of finance owing or whether there are other amounts owing such as fines.

“You need to be aware of these details before you commit to the purchase, but if you are arranging finance for the purchase, your financial institution may offer to do this for you,” Nicky says.

“It is crucial to ensure that finance is paid out before you pay any funds for the vehicle. If you are using finance to purchase the vehicle, your finance company will usually insist on paying out the current owner’s finance as part of their settlement process and will require payout letters from the seller.”

If in doubt, seek good advice such as engaging a reputable finance provider who can ensure the correct checks are made and all previous loans are discharged.

The RAC can conduct a PPSR search when undertaking a mechanical check of the vehicle, and if funds are borrowed through RAC Finance to pay for the car, clearing any outstanding loan is part of the settlement process.

“Getting that additional check gives the buyer a bit more confidence,” she says. “It’s worth it for the peace of mind.”