Buying a used car with outstanding finance? Here's what you need to know

Buying a used car safely is all about attention to detail. Checking the car itself over is one thing, but you also need to consider things like outstanding finance so that you don’t end up out of pocket. Luckily as long as you’re fully aware of the process, it should be relatively painless – and it’s a legitimate process to buy a car that’s on credit as long as all parties are informed.

Putting the physical inspection of the car aside for now, the first step when buying is to get a car history check to find out as much as possible about its past. It’s a sad fact that unscrupulous sellers put cars up for sale that have red flags in their history – such as an insurance marker for being stolen or crashed – without including that in the advert.

There’s also the risk that a car has outstanding finance. This is where a car hasn’t been paid off in full, so the finance company or bank still has a stake in the car – they own part or all of it, and could come to the new owner to pay up and settle the finance. That would be a nightmare for a potential buyer, so you definitely need to know if a car has outstanding finance. If it does, read on below to find out more and what you can do next.

What to do if a used car has outstanding finance

If you’ve discovered that a car has outstanding finance, whether from a history check or simply because the seller has given you the info in good faith, you should first check the company that financed it. You can speak to them over the phone and ask if the finance has been resolved, but you should always get written confirmation of this before buying the car. It may be the case that the finance has been paid off but the marker hasn’t been cleared yet.

The Data Protection Act will prevent the finance company from giving you a lot of details if the car does still have outstanding finance, but the seller may be able to give you more information about it informally. You can then go back to the finance company and confirm this figure with them. 

If you decide to buy the car, the remaining finance can then be paid directly to the company responsible, and any money left is paid to the seller. If the settlement figure is greater than the asking price, then both you and the seller should pay the finance company together – make sure everything is done in writing so you have a paper trail.

Alternatively, the owner can settle the finance in full, which you still need to confirm with the company, then you can buy the car. Once everything has been processed, the company should automatically remove the record of finance against the vehicle.

Do not pay the full amount for the car with the ‘understanding’ that the seller will later pay off the finance. There’s every chance they could take all the money and not pay the finance, leaving you in a difficult situation. If a seller asks you for this, it’s likely they are not acting in good faith and you should probably walk away.

Always remember – if you’re not happy with any arrangement or feel uneasy about buying the car, don’t be afraid to walk away.

What is meant by outstanding finance on a car?

• A secured loan used to purchase a new or used car outright (hire purchase)
• A PCP or business lease agreement with a balloon payment
• A contract hire agreement, including vehicles on Motability
• A loan secured on a vehicle after purchase, such as a logbook loan

Outstanding finance is an unpaid debt secured against the vehicle. When buying goods, the assumption is that the seller has the right to trade that asset, and cars and houses are the main purchases people make where not having this can make life very unpleasant for a buyer – since they are selling something that they technically don’t own.

Any vehicle that is offered for sale where a third party still retains an interest does not have ‘clean title’. The most common problem is that a finance company has loaned money to purchase the car, but it could also be a company asset or a vehicle that’s subject to dispute in a settlement such as a divorce or liquidation of a business.

Most history checks can only show if there is a finance agreement attached to the car, but there are cases where a vehicle may be reported stolen if it’s sold while in an ownership dispute.

Are logbook loans recorded on an HPI check?

Yes, they should be. A logbook loan is like equity release for vehicles, and can be horrific value for the customers who take them out. Interest rates for them are crippling, often set between 200% and 400% APR.

Obviously, buying a used car from someone in this position is a high risk strategy. Lenders are bound by the same terms as any other agreement, and that means any such debt has to be registered on the database – so it will show up in a history or background check.

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Don’t think logbook loans are rare, either – they’re offered online or in high street shops such as Cash Converters, and could be a very real issue when looking at cars under about £8,000 in a private sale.

Many companies offering such services retain the physical V5 document for the car until the debt is paid. That means anyone who claims to have owned a vehicle for a long time, but says the V5 is ‘lost’, could be hiding more than just a filing error.

Who is the legal owner of a car on finance?

In any case where a loan – hire purchase, car finance or PCP – has been used to purchase a car (even where the seller holds the logbook (V5C) and is liable for taxing it), that finance is secured against the asset. Until the debt is paid off, the vehicle is legally the property of the finance company.

If a car is leased, the leasing firm owns it and is responsible for the legal requirements of the car (apart from insurance in most cases). If someone offers you a lease (not PCP) vehicle before they have paid the contract off and bought the car, they don’t own it and can’t sell it.

If a buyer took out an unsecured personal loan to buy a car, including stating they wanted it to buy a car, they may think of it as having been financed when in fact, it is not. The key phrase is unsecured, which means the loan was purely for cash to be repaid – the bank doesn’t own the car.

Banks generally make unsecured loans for cars unless the customer is using an aftermarket PCP product or business lease tailored specifically for vehicles. If that’s the case they should be in no doubt as to the agreement.

What should I do if I bought a car with outstanding finance?

There are several factors affecting what you can do, but the first port of call would be to request a refund.

If you have bought a car from a dealer this should not be a problem within 30 days of purchase under the Consumer Rights Act 2015. If it was a conditional sale make sure you retain copies of their advertising, but you may need to allow a couple of days for finance company records to update if they claim to have paid it off when it was traded in.

If you bought the car privately you are covered by the Sale of Goods Act 1979 as the seller did not have the right to sell you the car. They should refund you immediately, but if you bought in good faith you are legally entitled to keep the car without interference from the finance company.

In England and Wales

Good title applies to cars bought in England and Wales if you buy a car privately (not for or through business), had no idea the vehicle was on finance or conditional sale and purchased it in good faith, and you are the first person to buy it from the debtor. If you buy it from someone reselling it you may also be protected, but it’s recommended to talk to Citizens Advice first.

In Scotland

Sale of goods in Scotland historically offered slightly more protection for buyers in that the concepts of ‘good title’ and ‘innocent title’ apply to more situations. It is still necessary to engage with the process to establish your legal ownership of the car and ensure finance firms pursue the person responsible for the debt secured against it.

When buying a secondhand car the stages of getting a receipt, saving the original advert, and documenting how and when you paid for it can help avoid a prolonged argument with a finance or insurance company – or even losing the car you purchased in good faith.

How do I know if a used car has outstanding finance?

Aside from relying on the honesty of the seller, and checking for paperwork relating to the car such as a purchase invoice, cash receipt or statement of completion for a finance agreement, you can pay for a Parkers car and vehicle history check. Most reputable dealers will state if a vehicle is ‘HPI clear’ when listing a car for sale, and many online classifieds also run a background check based on the vehicle registration mark. Some online classified sites even do basic checks for you for free.

Is it safe to buy a car with outstanding finance?

If you know a car has outstanding finance, you shouldn’t buy it until the finance has been settled. This is particularly relevant when a dealer offers a car for sale on behalf of a customer.

Even with legal production for good faith sales, finance companies may do things like marking a car stolen. This can lead to it being seized by the police. For this reason, if a finance firm contacts you about an outstanding debt on a car you bought, talk to them immediately.

Is it illegal to sell a car with outstanding finance in the UK?

Fundamentally yes. If you sell a car to a private individual without disclosing the outstanding finance or settling it before ownership is transferred, you are breaking the law.

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However, you can sell a car with outstanding PCP or HP finance to a dealer or car buying service as long as you disclose the outstanding balance. They will usually pay off the finance and return any remaining balance to you.

You cannot sell a leased or contract hire car because it doesn’t belong to you and you have no right to purchase at the end of the agreement.

If you need to sell your car, and have paid more than 50% of the total liability (including the balloon payment, not just the monthly figures), you may be able to return it and end the finance under voluntary termination.

The editor’s top tip!

Used car buyers should carry out a car registration check before buying any car in order to make sure it hasn’t been involved in an accident, stolen, or is subject to outstanding finance. Even if no finance record is shown, a car can still have money owed against it. A car check will offer insurance and protection against this.