What happens if I buy a car with debt owing on it?

Published 22 Jan 2019

Buying a car from a private seller can often have you paying less than you would through a dealership. Yet buyers should be aware that cars can sometimes have money owing on them, and if they purchase such a vehicle, the creditor has a right to the vehicle as collateral for the debt.

What does it mean for a car to have money owing?

It might sound strange to speak of a car owing money, but that can be exactly the case if the previous owner purchased it through a financing agreement, or if it's been used as security for another loan. Cars that have money owing on them are known as encumbered vehicles.

In these cases, if the debtor fails to meet their obligations the parties with outstanding interests have first right to the vehicle, even over you as the new owner.

Why is this a special case?

What makes buying cars purchased with finance different from something like buying a house with the same arrangement is that the loan is tied to the vehicle itself, not the debtor. When buying a house that has been purchased with a mortgage, what usually happens is the seller will pay off their debt with cash they received from the sale. But even if they don't, the debt obligation is still on them, because it doesn't transfer with the ownership of the house like it does with a vehicle.

Can you still purchase an encumbered vehicle?

There's nothing stopping you from purchasing an encumbered vehicle if, for instance, the seller assures you they will pay off the debt with the money they receive from the sale. One way to do this is to conduct the sale at the office of the creditor, so you can be assured the debt is paid as soon as the money and ownership is transferred.

It's always the buyer's responsibility to check whether there are any outstanding interests on the car before they purchase it. If you don't check, there's nothing you can do should the creditors come knocking for the car. An encumbered car can be a liability rather than an asset, so always be sure to check the Personal Property Securities Register (PPSR) before buying. The PPSR is a register of all the vehicles and other valuable assets that are used as security for loans. It costs $25 to check a vehicle, but it's a wise first step should you be considering purchasing a potentially encumbered car.

If you're interested in purchasing an encumbered vehicle, but need advice on how to do so safely, get in touch with the team at Malouf Solicitors today.

Please call us on 02 8833 2000 to speak with a lawyer

I remain extremely grateful for Maloufs legal representation related to my financial management of the estate of my brother and for your continuing help and advice in this matter. As an aside, I always recommend Maloufs to my friends and family members who are seeking the best legal representation - only last week, I strongly advised a close family friend that their best interests would be served by arranging an appointment at your Parramatta offices.
John of Parramatta NSW

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