The Expert Podcast

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So, you have a car, you have a payment, and you can't afford it—what do you do? Well, most cars that are purchased new or used are bought with a loan. Many times, that loan becomes a problem for one of two reasons: either you can't afford the payments anymore because of your income, or the amount that you owe is more than the value of the vehicle, and not by a little bit, but by a lot. That's called negative equity. What do you do about it? That can affect your life. If you can't afford your payments, you can't keep the car. Eventually, they’re going to repossess the vehicle. If the car is worth less than what you owe, even if you can afford the payments, you have negative equity, and that can affect your net worth and even trading it in to get a new vehicle.

There are some things happening in the marketplace that are indicating this is a bigger problem than people think. One of the fastest growing Google search terms is "give car back." If you look here in this article, it says that “give car back” searches are at an all-time high during the first quarter of 2023. The average car payment in 2023 was $725, but now we are seeing car payments close to $800 or $900. We'll explain how that math works. In the meantime, auto loan delinquencies are up, surpassing the levels we saw before COVID. People are wanting to get rid of their cars.

So, what can you do? You can try to sell it, but if you owe more than it's worth, no one's going to pay the amount you need. Or, you can do a car short sale. A car short sale is where you approach your lender and tell them, "Look, this car is worth $20,000, and my loan balance is $27,000. I'm not going to pay the payments anymore, you need to take it back, and waive the $7,000 of negative equity." Will they do it? Well, there are ways to approach that. Many banks have a short sale department for vehicles that you can approach. Some of them have packages or forms you can fill out. You’ll have to prove that your income can't afford the vehicle, that you don't have a million dollars in the bank, and that you’re in a hardship situation. If you prove all that, many banks will accept a short sale. You have to do the paperwork right and fit the criteria.

This is very similar to what happened during the 2008 housing market crash, where people were giving back their houses—just turning in their keys. Vehicles work the same way. In many cases, it's better than doing a repossession, even a voluntary repossession. The reason why is that it may affect your credit less. That’s up to the lender to decide. Either way, if you get them to agree to a short sale, the negative equity is waived. This means that if you do a repossession—even a voluntary repossession—on a $20,000 vehicle that you owe $27,000 on, they’re going to come after you for the $7,000 difference. Because they lost that money, plus they’re going to tack on fees for the repossession, the storage, the shipping, the auction fees, and any other fees they can. You might end up owing $30,000 on a $20,000 vehicle, and that’s $10,000 of debt you’ll have to deal with, with no vehicle anymore. If you do a short sale, they’ve agreed to waive that difference.

Another benefit of a short sale is that it locks in the value of the vehicle. If you look it up and see that the current value is $20,000, they might repossess it, take it back, and sell it at an auction for $18,000. Maybe there weren’t enough buyers, or the car wasn’t in good condition. By going with a short sale, you lock in the value of the vehicle that they will get. In addition, the short sale is smoother and more convenient. You may be able to get some rebates on your insurance, and things like add-ons to your loan, such as extended warranties or gap insurance.

The most important thing is doing the paperwork the right way and getting some instructions from our website. Banks don’t necessarily publicize this program. They’re not out there begging people to do it because they lose money when it happens. But you may find it on their website, buried in their corporate documents. Even if you call them, sometimes the representative won’t tell you about a short sale. So, you just have to do the legwork on your own. Even if you don’t find anything from that lender, put together a generic package for a short sale application. You’ll probably have to demonstrate the condition of the vehicle, prove its book value by getting printouts, and declare that you don’t have a lot of money laying around.

Most lenders prefer a short sale over a repossession because they don’t have to find you. They don’t have to spend money on investigators trying to track you down or doing skip tracing. They know that the vehicle is going to be in a certain condition. If you're getting your car repossessed, some people smash their car up. But with a short sale, they’re going to make sure that you agree to give it to them in good condition with all the keys, remotes, manuals, and the spare tire. Here’s the thing: something as small as a spare key, if you do a short sale and give them all your keys, can save them money. In this day and age, an electronic remote control can cost a few hundred dollars. So, if you’re missing two of them, that could be $600 they save right there.

Appeal to the lender’s interests and try to do a car short sale rather than a repossession or voluntary repossession. That way, you can catch it before it becomes a snowball effect, and you’re surprised one day by not having your car in the driveway with your stuff in it. A short sale also gives you the opportunity to take all the stuff that belongs to you out of the car, so you don’t have to try to convince a tow yard operator to let you get your camera, phone, skis, or whatever else you have in your car.