What To Do When You Owe More Than Your Car Is Worth: Navigating Negative Equity
Download MP3More and more car owners are finding that their car loans are becoming a serious liability. Whether the payment is too high or the debt is too high, they are running into some problems. So, what do you do about this? Over the last three years, new car prices and even used car prices have gone through the roof. Many people bought cars with payments of $700, $800, $900, even $1,000 a month. Not only that, but the amount that was financed was sometimes extraordinarily high compared to the value of the vehicle. So, what's happening?
Now, after a couple of years, people have cars that are two years old with maybe 50,000 to 60,000 miles on them, and they’re still paying $800 or $900 a month. Meanwhile, inflation has kicked in with gas prices, grocery prices, and insurance costs going up. Wages may not have increased accordingly, and they can’t afford their car payments. They go to try to sell the car only to find out they owe more than it’s worth. Maybe you bought the car for $45,000 and still owe $35,000, but it’s only worth $30,000 or $28,000. What do you do?
Well, obviously, you could give the car back and let it be repossessed, but that would mess up your credit. More frequently, both borrowers and lenders are looking at a process called a vehicle short sale or car short sale. It’s similar to what was happening in the 2000s with real estate when people owed more on their homes than they were worth. You contact the lender and work out a deal. The way it works is by presenting the lender with three key things.
First, you have to show that you can’t afford to make the payment. You’ll need to provide documentation of your income and expenses to prove that you’re not just trying to get out of something you could afford if you had to. If your income is lower or your expenses are higher, you’ll have to prove that you’re in financial distress. Second, you need to demonstrate the vehicle's worth. If you owe $30,000 on the vehicle but it’s worth $35,000, they won’t have any sympathy for you. But if it’s worth $22,000 or $23,000, and you can prove that, they’ll recognize that if you stop paying, they’re going to lose money. A short sale might result in them losing less.
The third thing is to put together a proposal. For example, if you owe $30,000 and the vehicle is worth $22,000 in the book, maybe you find a buyer willing to pay $24,000 or $25,000. You can propose to the lender that you sell the vehicle for $25,000. It’s not enough to pay off the loan, but you ask if they’ll accept that as a short sale and give the title to the buyer. The lender will want to make sure your buyer isn’t just you trying to save money on your loan. They’ll want to verify that it’s an honest, third-party transaction.
If they repossess the vehicle, it might only be worth $22,000 at auction. They’ll spend $1,000 on repossession and another $1,000 on transporting it to the auction. After auction fees, they might only get $18,000 for it, so they’re losing another $5,000 to $6,000 on top of the initial deficiency. They might try to come after you for the money, but if you can’t pay your car loan, they know they probably won’t get it. It’s like getting blood from a stone. However, if you present them with a clean, tied-up deal that nets them $25,000 with no auction fees or repossession costs, they might like that idea.
What about the difference if you sell it for $25,000 and owe $30,000? You can ask the lender to waive the remaining $5,000, although they may or may not agree. At the very least, you’ll get out from under your payments. Even if you have to pay that $5,000 over time, it’s better than owing $10,000 after they repossess the car and tack on fees. Sometimes lenders will waive the balance; other times, they’ll allow you to make payments. In some cases, it may not show up on your credit as a repossession, so you need to ask. The worst-case scenario is that you get out of your payments and owe less.
In some cases, clients don’t have to pay the difference at all. If they do, they can pay it over time—maybe $100 a month for four years—rather than $900 a month. So, look into a vehicle short sale. You can visit carshortsale.com for more information. We also offer a service to prepare the documents for you if needed. It’s an underused and underappreciated way to remove liability from your car loan. Not every lender publicizes it because they don’t want everyone doing it, but it’s an option when it’s really needed.
Thank you for watching. Remember, you can access live, one-on-one personal consultations with a licensed private investigator, a licensed commercial insurance broker, a certified real estate title examiner, or a certified civil court mediator. If you need to talk to an expert in any of these fields—or even a licensed general contractor—click the link below to arrange a live, one-on-one consultation where you’ll have their undivided attention.