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 Edmonds. Edmonds is a very highly respected, long-time automotive industry publication. They've been researching automotive values for years. They used to have a book value, Edmond's Motor Guide—kind of like a blue book value for car values. They track values and automotive data very, very thoroughly.

According to their data, 25% of trade-ins towards new car purchases have more than $10,000 in negative equity. What does that mean? That 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 would always be worth less than what you owed. But usually, it was just $1,000, maybe $2,000. I can remember the first time we saw a $2,000 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. Then, it started to be $3,000 or $4,000 as normal, then $5,000. Now, according to this data, 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 you’re buying. It gets added to the price and the loan of that new car. So, for example, if you have a vehicle that’s worth $20,000 on trade-in but you owe $30,000, that $10,000 of negative equity (also called being upside down or underwater) gets added to your new car loan. Not only do you have that negative equity, but you also face depreciation on your new car, making the situation even worse. In four or five years, some people could have $20,000 in negative equity.

You don’t want to do that. You also don’t want to do a voluntary repossession—just handing the car over to the lender—because you’ll be stuck with a deficiency judgment for that $10,000. Instead, you can look into what's called a car short sale.

A car short sale is a process where you work with your lender, filing some paperwork to allow you to sell the vehicle for less than what you owe. You could sell it to a dealer on trade-in, on Craigslist, or privately. However, normally, you can't transfer a car without a title, and the bank holds the title due to your loan and negative equity. With a car short sale, you can transfer the car and get out from under that payment.

If your car payment is $800, $900, or even over $1,000 per month, a car short sale can help you move on to a cheaper or more efficient car—something that fits your needs better. It’s a way to escape negative equity.

How does it work? Different lenders have different policies, and we work with all of them. You can find more details in the link below, but generally, you need to file a package of documents, including a declaration of interest, an evaluation report, a sale affidavit, and other paperwork. Lenders may check to ensure you’re truly in financial need (for example, they’ll verify you don’t have a million dollars in the bank or a $200,000 yearly income). Once you submit this package, the lender will evaluate it.

Most lenders would rather do a car short sale than a repossession because they can get more money for the car and settle the deficiency right away. If you have $10,000 in negative equity, they might waive $8,000 and let you pay the remaining $2,000 in small installments—maybe $100 a month for a couple of years.

If you just do a voluntary repossession, however, that full $10,000 will be dropped on you as a judgment or debt. It could be taken from your paycheck or bank account. If you trade it in, that negative equity rolls into your new loan, and you’ll be paying interest on it. If your new car loan has a 10% interest rate and you’re carrying $10,000 in negative equity, that’s an extra $1,000 in interest per year, possibly for five, six, or even seven years.

A car short sale can help you avoid this. Even if you have to pay a small portion, you won’t be paying interest on the full amount, and you won’t have to deal with a voluntary repossession. You also won’t be at the mercy of a dealer trying to manipulate your new car pricing due to your negative equity.

So, look into a car short sale. Don’t let negative equity keep you from getting a car that fits your needs or escaping a car that no longer works for you. If you click the link below, you’ll find options to start the process. You can also schedule a live, private consultation with a certified title expert who can walk you through your specific situation and lender options.

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