The Expert Podcast

This is a very troubling development in the automobile market, where people who own vehicles now have more negative equity than ever before in history. This is from Edmunds. Edmunds is a very highly respected, longtime automotive industry publication. They've been researching automotive values for years. They used to have a book value guide—Edmunds Motor Guide—which is kind of like a blue book value for cars. They track values and automotive data in very detailed ways.

Edmunds is saying that 25% of trade-ins toward new car purchases have more than $10,000 in negative equity. What does that mean? It means you owe more than the car is worth. Well, that's always been the case. You can go back in history—10, 20, even 50 years—and if you had a trade-in that you still owed money on, it always had more owed than it was worth. But usually, it was $1,000, maybe $2,000. I can remember the first time we saw $2,000 in negative equity—it seemed like a lot of money.

Over the last five or six years, $2,000 was really not that big a deal. It started to be $3,000 or $4,000 as normal, then $5,000. Well, now, according to this report, a quarter of people who have a trade-in have $10,000 in negative equity. That's immense. So, if you have a vehicle that you owe more on than it’s worth, what do you do? How do you get out of it?

If you trade it in, that negative equity gets tacked onto the new car that you're buying. It gets added to the price and loan of that new car. For example, if you have a vehicle worth $20,000 on trade-in but you owe $30,000 on it, that $10,000 negative equity—sometimes called "upside down" or "underwater"—gets added onto your new car loan. Now, not only do you have that negative equity, but whatever depreciation hits your new car, it adds up even more. So in four or five years, people end up with $20,000 in negative equity.

You don’t want to do that. You also don’t want to do a voluntary repossession. You don’t want to just hand the car back to the lender because now you’ll have a deficiency judgment of that $10,000. But what you can do is look into what’s called a "car short sale."

A car short sale is a process where you work with the lender by filing some documents and paperwork to allow you to sell the vehicle for less than what you owe. That’s why it’s called a short sale. You could sell it to a dealer as a trade-in, sell it on Craigslist, or sell it privately. However, selling it privately can be tricky because you can’t transfer the title if the bank still holds it due to the outstanding loan and negative equity. But if you arrange for a car short sale, you can transfer that car and get out from under that payment.

If you have a payment of $700, $800, or even $900 (some people are now seeing payments over $1,000), a car short sale can help you escape that. You can sell the car and move on to something else—maybe a cheaper car, a more efficient one, or something that fits your needs better. A car short sale is a way to get out of negative equity.

How does it work? Different lenders have different policies. We work with all of them, and you can see the link below for more details. You’ll need to file a package of documents, including a declaration of interest, a valuation report, a sale affidavit, and other necessary paperwork. Sometimes, lenders want to verify that you truly need help—for example, they may check that you don’t have a million dollars in the bank or a $200,000 yearly income. They want to make sure they’re helping someone who genuinely needs assistance.

Once you submit the package, the lender evaluates it. In most cases, they’d rather do a car short sale than a repossession because they’ll get more money for the car and can account for the deficiency immediately. If you have $10,000 in negative equity, for example, the lender might waive $8,000 but require you to pay $2,000—perhaps at $100 per month over a couple of years. They will work with you.

If you simply do a voluntary repossession, that $10,000 gets turned into a judgment and debt that you’ll be responsible for. The lender can take it out of your paycheck or bank account. If you trade in a car with negative equity, that debt rolls into the new loan, and you’ll be paying interest on it. For example, if you have a $10,000 negative equity balance on a loan with a 10% interest rate, that’s an extra $1,000 per year in interest for as long as the loan lasts—maybe five, six, or seven years.

A car short sale helps you avoid this. Even if you have to pay a small portion of the debt, you won’t be paying interest on all of it. You also won’t be letting the dealer take advantage of you on pricing just because of negative equity.

Look into a car short sale. Don’t let negative equity stop you from getting the car you want or escaping payments on a car you no longer want. How do you do it? Click the link below to start the process. We also offer live, private video consultations with certified title experts who can walk you through your options, evaluate your vehicle and lender situation, and help you find the best path forward.

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