Can I Sell Something if It Is Part of a Secured Loan?

When you use property to secure a loan, you are placing that property down as collateral. The lender puts a lien on the property, meaning the lender has a claim on the property until the loan is paid off. You cannot sell something if it is part of a secured loan unless you have satisfied the terms of the loan and had the lien removed. Typically, this happens at the time of sale.

Procedure

A common example of selling property that is part of a secured loan would be selling your car. You took a car loan three years ago, and you are expected to pay that loan off in two more years. Right now, you owe $5,000 on the loan. You want to sell the car. When you do so, you can use the proceeds of the sale to pay off the $5,000 loan, satisfying the lien. Often, if you are selling a car to a dealer, the dealer will arrange this for you.

Complications

Complications arise if you are selling property with a lien, but you do not plan on settling the lien with the proceeds of the sale. For example, imagine in the scenario above that you plan to keep 100 percent of the proceeds from the sale of your car. In this case, the original lender will need to approve the sale of the property. You and the lender will have to work out a different arrangement to settle the terms of the loan. These complications are exacerbated if the lien on your property is a tax lien or otherwise involves the government.

Replacement Collateral

One option is to replace the collateral you are selling with another form of collateral of equal or greater value. For example, you can sell your car, keep the proceeds and replace the collateral for the car loan with home equity. In this case, you have modified or refinanced the loan from a car loan to a home equity loan. This can be complicated to arrange directly with a lender.

New Loan

An alternative to replacing collateral with a lender is refinancing the loan with another lender. For example, you can take a new loan for $5,000 using your home equity as collateral. You can use this loan to pay off your existing car loan, satisfying the lien, and then sell your car. This is typically the simplest option to pursue if you are not satisfying the lien with proceeds from the sale.