The Expert Podcast

So, how does negative equity end up happening with a vehicle? If you own a vehicle that's financed, you probably have discovered you have negative equity, meaning that you owe more than the vehicle's worth. How does that happen? And what do you do about it? Well, first we'll talk about how it happens. Then we'll explain what you can do to get out of the negative equity.
Negative equity happens because the price of the vehicle is too high and the depreciation is also too high. That makes the value too low. Here's an example of how dealerships do this. The dealership plays around with the numbers when you're buying a car. And in this case, the person ended up buying a vehicle for $70,000 for a Ford Explorer, which is probably a 40 or $50,000 vehicle. But they can jockey around the numbers when you purchase it and put all kind of add-ons on the loan, additional dealer markups, other types of packages which will inflate the value of the vehicle, inflate the price of the vehicle. It doesn't really inflate the value. It just inflates what you end up paying for it. And we'll talk about later why this may be a good thing that it's inflated through markups and add-ons rather than just the price because it may help you with your negative equity.
So, this is not a type of event that's isolated. This event where this person paid $70,000 for this vehicle is very very common. So, first the result of a $70,000 purchase is you'll probably end up with a payment about $1,500 a month. A car loan payment for a vehicle that costs $70,000 is about 14 to 15 or 1,600 depending on the rate and how much you put down.
At the same time, after you buy that vehicle, now you're going to have depreciation. And this is lane watch, which is a reflection of auction values. So when vehicles are sold at used car auctions, that is what determines book values, blue book values. The different automotive used car value guides use auction results to put together what the values of cars should be. And when auction values go down, that affects the book value. Well, in June there was accelerated depreciation, meaning that the values are dropping more than normal. When that happens, you end up with negative equity.
So, first of all, you have a high price and a high payment, negative equity. What does that result in? Well, it results in late loan payments. And according to automotive news, the loan payment delinquency rate is as high as it's been. It's a record and people are not able to afford their payments. Maybe that describes your situation. If you're in that situation, normally you would think, well, I'll just sell the car or I'll trade it in. But if you have negative equity, you may not be able to get out from under that car. It's called being underwater or buried in the car. And it makes it tough because now you have a high payment and no way to get out of it.
What's even worse than the loan payments is repossession is also at a high. 2 million repossessions just through April. That was in the first three months, four months. Two million repossessions. That's also a record. So the strain on automotive financing, automotive payments is being felt. Now what happens when these 2 million vehicles hit the auction? Well, you're going to also have more depreciation. It's going to affect the value. So it's a spiral. It's like a treadmill.
So what do you do? How do you get out of it? Well, what you do is you first identify your known negative equity. If you have a vehicle that's worth $20,000 and you owe 30,000, that means you have a 10,000 negative equity. So what do you do to shrink that down? Well, the car short sale process is the method to shrink it down and then absorb or capitalize that remaining difference.
How that's done is by first looking at the loan balance. There are many times dozens of credits and reductions you can use to chop down that loan balance. Remember, we talked about those add-ons that were put on the loan at the beginning. Many of those add-ons, if not most, can be cancelled and refunded. So, if you have a big gap insurance package or service contract or some other add-on that was put on at the dealership, you can cancel that by law, remove it from your loan balance. It won't change your payments, but it will reduce your loan balance maybe from 30 to 28 to 26, 27, who knows? But if you can chop it down three or 4 thousand, now you're closer to getting out of the vehicle.
What can you do on the other end? On the other end, you can take that valuation that you may have received. Maybe you got a wholesale offer from a dealer. Maybe you got a trade-in value from a dealer. Those are wholesale blue book value type offers. What you want to do is look at resale offers. Now, resale is different than retail. Retail is the end user buying the car. You're probably not going to get retail for your car unless you happen to come across somebody local to you that is wanting that exact car. The problem is you're competing with dealers who have reconditioned the car. They have salespeople. They have advertising. They polish it up so it looks good. You're never going to get that high level of value. But you can get resale which is going to be higher than the wholesale that you may have already been offered. And there's different methods and platforms and groups and networks you can use to get that.
So, let's say now instead of 20,000, you have a quote of 22,500. Remember, you may have reduced your balance down to 26. Well, now you're only a few thousand apart on your negative equity. And if you're only a few thousand apart, there's a couple other little throwins you can get to have that reduced. Your original selling dealer may have had a rate participation you can ask them to contribute. Your lender may have programs for default avoidance that you can get them to contribute because they don't want the car back. They don't want a repossession. It cost them a lot of money. And so maybe you can chop it down to where the difference is only $2,000.
Well, if that's the case now, maybe you're closer to being able to do a trade in. Or maybe if you have some of that money, maybe you have 500, that leaves 1,500 of a balance, you can either get the lean holder to allow that difference to be paid over time, maybe a hundred bucks a month for a year or so. Maybe you can get an unsecured lender. Those are all options that you can use to capitalize that difference to get that car out from under you. So you're not paying $15, $1,800 a month for a car payment. And get rid of that negative equity.
Upside down, negative equity, buried, whatever you want to call it, in a car is a curse on the automotive market. It's really creating a lot of despair for borrowers who feel like they're trapped and can't get out of their car. And in the old days of negative equity numbers in the $2 or $3,000 range, a dealership could roll that into your new car. That wasn't necessarily a good thing because when you bought your new car, now you instantly had negative equity on that new car, but at least you can get out of your old car. Now, when people have 8 and 10 or 15,000 or more of negative equity, there's nothing dealers can do to trade you out of it.
So, this car short sale process, sometimes called lean mitigation or lean mediation, is a way to have that negative equity absolved so you can get out of your car, get out of that payment, and either have one less car in your household or maybe get a cheaper car with a lower payment that's more easily affordable.