Buying an Encumbered Vehicle: What You Should Know

Purchasing a used vehicle is the best option for most people to get their hands on a new car. The costs are lower and you get a great range of vehicles to choose from. But buying second hand comes with its fair share of risks. Your car has a history, and if the seller isn’t honest, that history could come back to buy you. One of the biggest risks is buying an encumbered vehicle.

What does it mean for a vehicle to be encumbered? Why should you avoid it? And what can you do if you do buy one?

Let’s take a look.

What is an encumbered vehicle?

When we talk about an encumbered vehicle, we’re talking about a financial encumbrance.

OK, so that probably doesn’t make it much clearer. A financial encumbrance means that the vehicle has been used as a security for a loan. The most obvious example would be if someone takes out a car loan from a financial institute and uses the car as collateral. If the person defaults on their repayments, the financial institution takes the car itself as payment.

What’s wrong with buying an encumbered vehicle?

A vehicle is encumbered regardless of who is in possession of the vehicle as long as the loan remains open. What does that mean for you? Here’s a simple example:

Bob gets a car loan to buy their car, using the car itself as collateral. The loan is for seven years. After four years, they decide to sell the car.

You go looking for a second-hand vehicle and find Bob’s car. It’s just what you wanted! You purchase the vehicle from Bob and drive away, happy as can be.

Bob, however, stops making his loan repayments. Since the loan is still open, the lender comes to repossess the vehicle. Bob tells them he’s sold the vehicle to you. Since it’s now in your possession, the debt collectors take the vehicle from you, leaving you with nothing.

How can this happen? You bought the car — isn’t it yours?

Well, yes. You’re the legal owner of the vehicle, sure. But the vehicle is still registered as a security on the original loan, and therefore the lender is able to reclaim the vehicle to pay off that loan. It doesn’t matter who owns the car or how many times it’s been sold since; the car can always be reclaimed if the loan is defaulted.

Is it illegal to sell an encumbered vehicle?

Not at all. If someone sells you an encumbered vehicle and it’s recalled, you have no real course of action. You can’t get a refund from the buyer and the lender certainly isn’t going to reimburse you.

It is, however, illegal to mislead or lie to a person when selling something. So if the seller told you it wasn’t encumbered but it actually was, then you’d have grounds for a refund from the seller (Which, realistically, would potentially turn into a lawsuit to retrieve the funds.

How can I avoid buying an encumbered vehicle in Australia?

The simplest way is to check to see if the vehicle’s encumbered or not. How? By getting what’s known as a PPSR report (formerly known as a REVS check).

Using a site like quickrevs.com.au, you can enter the VIN of a vehicle you’re looking at buying, pay a small fee, and get a comprehensive car history report in minutes. The report collects the car’s information off the PPSR and presents it in an easy-to-read format, with encumbrance status clearly labeled.

What is the PPSR?

The PPSR (Personal Properties Securities Registry) is a national registry of personal property used as securities on loans. It lists things like cars, motor vehicles, and even expensive works of art.

Cars are immediately registered with the PPSR when their VIN (vehicle identification number) is registered in Australia. This information includes the make, model, production year, and engine part number.

When a car is used as a security on a loan, this information is attached to its details on the PPSR. It will also be updated with any insurance claims made against it, for example, if the car is written off in an accident.

All of this information is also included when you request a PPSR report.