Can You Donate a Car That’s Still Financed? What You Need to Know

Donating a car to charity is a generous way to give back and can come with tax benefits. But what happens if the car you want to donate is still financed? Can you donate a car that has an outstanding loan? The answer is yes, but the process is a bit more complicated than donating a fully paid-off vehicle.

If your car still has a loan balance, there are a few extra steps you’ll need to take to ensure a smooth donation. This guide explains how you can donate a car that’s still financed, what paperwork is needed, and how you can still make a meaningful contribution to a charity.

(Interested in donating a car with expired registration? Read: Can You Donate a Car with Expired Registration? Here’s How It Works)

🚗 1. Can You Donate a Financed Car?

Yes, you can donate a car with an outstanding loan. However, the process is slightly different than donating a fully paid-off vehicle. You need to clear the loan or work with the lender to transfer the vehicle to the charity.

What You Need to Know:

• The lender’s approval – Your lender must agree to the donation. If the car is under financing, they hold a legal claim to the vehicle.
• Loan balance – If the car is worth more than the loan balance, the charity can accept the vehicle. However, if the value is less than the loan balance, you'll need to cover the difference.
• Paying off the loan – Many people choose to pay off the loan before donating to simplify the process.

💡 Pro Tip: Contact your lender before you donate. Some lenders may be willing to work with you or even forgive the loan balance for charitable donations.

📑 2. Steps to Donate a Financed Car

Here are the steps to take when you want to donate a car that’s still financed:

Step 1: Contact the Lender

The first step is to contact the lender and explain your intentions to donate the vehicle. You’ll need to get the lender’s approval before you proceed. In some cases, the lender may want to receive the full payment on the car to clear the balance.

Step 2: Pay Off the Loan (If Necessary)

If the car’s value is greater than the loan balance, the charity can accept it. However, if the loan is higher than the car’s value, you may need to pay off the remaining balance.

Step 3: Contact the Charity

Once you’ve sorted out the loan, reach out to the charity you want to donate to. They will guide you through the process and let you know if they require any specific documentation.

Step 4: Transfer the Title

The lender will work with you to release the lien on the vehicle. After that, you can transfer the title to the charity. You’ll also need to complete any required paperwork, such as a release of liability form.

💡 Pro Tip: If the car has a lien and you’re not able to pay off the loan, the lender may be willing to accept payment directly from the charity or work out a payment plan. Always ask!

📜 3. What Paperwork is Needed to Donate a Financed Car?

When donating a car with an outstanding loan, you’ll need to gather several pieces of paperwork to ensure the donation goes smoothly.

Documents You Will Need:

1. Title Transfer – You’ll need the vehicle title to transfer ownership to the charity. The lender’s lien will need to be cleared first.
2. Loan Payoff Statement – If the loan is paid off, you’ll need to provide a loan payoff statement to show the lender no longer holds a claim to the car.
3. Release of Liability Form – This protects you from any future liabilities after donating the car.
4. IRS Form 1098-C – If the vehicle is worth over $500, the charity will issue you this form, allowing you to claim a tax deduction.

💡 Pro Tip: If your car is sold or repurposed by the charity, they will provide tax documentation once the vehicle is processed.

💰 4. Can You Get a Tax Deduction for Donating a Financed Car?

Yes! You can still receive a tax deduction for donating a financed car, but the deduction amount will depend on a few factors.

How the Deduction Works:

1. Car Value vs. Loan Balance – If the car’s value is greater than the loan balance, you can claim the vehicle’s full value as a deduction.
2. Loan Payoff – If you pay off the loan before donating, the full sale price or fair market value of the vehicle can be deducted.
3. Partial Donation – If the vehicle’s value is less than the loan balance, you may be able to deduct the amount that the charity sells it for or its fair market value.

💡 Pro Tip: Always keep IRS Form 1098-C from the charity for tax purposes, and consult with a tax advisor to maximize your deduction.

🔧 5. Alternatives if You Can't Pay Off the Loan

If you’re unable to pay off the loan balance but still want to donate your car, there are a few alternative options available.

What You Can Do:

• Work with the Lender – Some lenders will allow you to donate the vehicle directly to the charity, and they will handle the loan balance.
• Sell the Car – You can sell the car privately, use the proceeds to pay off the loan, and then donate the remaining value to charity.
• Offer a Partial Donation – If the car’s value exceeds the loan balance, you can donate the equity or remaining value to charity.

💡 Pro Tip: Speak with your lender before making any decisions. Some lenders may allow you to transfer the loan to the charity or forgive the remaining balance if the vehicle is donated to a recognized charity.

📢 Ready to Donate Your Financed Car?

Donating a financed car is absolutely possible, and it can make a significant impact. Whether you’ve paid off the loan, negotiated with the lender, or covered the difference, you can still donate your vehicle and benefit from a tax deduction.

👉 Donate your car today and help a charity while receiving a potential tax break!