Troubling Development in the Automobile Market
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 in the market automotive industry publication. They’ve been researching automotive values. They used to have a book value, Edmond’s Motor Guide. They may still have it. That’s kind of like a blue book value for car values, and they track values and they track automotive data very, very detailed.
Negative Equity in Trade-Ins
What they’re saying is that 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, 50 years, and if you had a trade-in that you were owed money on, it always is going to have more money owed than what it’s worth. But usually, it’s a thousand, maybe 2,000. I can remember back the first time we saw a $2,000 negative equity, it seemed like a lot of money.
Increase in Negative Equity Over the Years
Over the last five or six years, 2,000 was really not that big a deal. It started to be like three and 4,000 was normal, then 5,000. Well, now, according to this, a quarter of the 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 than it’s worth, what do you do? How do you get out of it? Well, if you trade it in, that negative equity gets tacked on to the new car that you’re buying, gets tacked onto the price and the loan of that new car.
Impact of Rolling Negative Equity into a New Car Loan
So if you have a vehicle that, let’s say, for example, is worth $20,000 on trade-in but you owe 30,000 on it, that 10,000 upside down or out of equity or underwater—they call it different things—gets added onto your new car. So now, not only do you have that negative equity, but whatever depreciation on your new car, it adds up on there too. So you know, in four or five years, you could have people with $20,000 negative equity. So 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 into the lender because now you’re going to have a deficiency judgment of that $10,000.
Understanding Car Short Sales
But what you can do is you can look into what’s called a car short sale. Car short sale. And a car short sale is a process where you work with a lender with filing some documents, filing some paperwork to have the lender allow you to sell the vehicle. That’s why it’s a short sale—to sell the vehicle. And you could sell it to a dealer on trade-in, you could sell it on Craigslist, you could sell it privately for an amount that’s less than the amount that you owe. Because if you look to sell the car privately, you can’t transfer the car without a title, and the bank is holding the title because of that loan and that negative equity.
Benefits of a Car Short Sale
But if you arrange for a car short sale, you now can transfer that car, get out from underneath that payment. If you have a payment that’s $800, $900, sometimes we’re seeing payments over $1,000, you can now get out from under that payment, sell that car, and move on to your next car. Maybe it’s a cheaper car, maybe it’s more efficient, maybe it’s something that fits your needs better. But doing a car short sale is a means to get out of that negative equity.
How a Car Short Sale Works
How does it work? Well, different lenders have different policies, and we work with all of them. You can see the link below for some of the more details. But you file a package of documents that are a declaration of interest, evaluation report, a sale affidavit, a bunch of other documents. Sometimes they’re going to ask you to make sure that, you know, you don’t have a million dollars in the bank. You know, you don’t have, um, you know, $200,000 a year income. They want to make sure that they’re legitimately helping a person that needs help.
Lender Considerations in a Car Short Sale
And you put that package together, you file it with the lender, and they’re going to evaluate it. In most cases, they would rather do a car short sale instead of doing a repossession because they’re going to get more money for the car. And the difference, that’s the deficiency, they can account for it right then. So sometimes if you have, let’s say, negative equity of 10,000, they might say, “Well, we’ll waive 8,000, but you have to pay 2,000, but we’ll let you pay 100 a month for a couple years.”
Why Avoid Voluntary Repossession
So they’ll work with you. If you just do a voluntary repo, what happens is that 10,000 gets dropped on you as a judgment, as a debt, and you have to pay it. And they’ll take it out of your paycheck, out of your bank account. Or if you trade it in, that negative equity now goes onto the new loan, and you’re paying interest on it. If you get a new car loan, let’s say, at 10% interest, if you have a $10,000 negative equity, that $10,000 is costing you $1,000 a year in interest for as long as you have that car loan. Could be five years, could be six years, could be seven years.
Final Thoughts on Negative Equity and Car Short Sales
So you don’t want to do that. And it’s the whole 10,000. If you do a car short sale and you have some of it or all of it waived, you might have to pay a little bit, but you’re not paying interest on all that money, and you’re not having a voluntary repo. And you’re also not confusing that with the new car that you’re buying. You’re not letting the dealer mistreat you on pricing because you have negative equity. So look into a car short sale. Don’t let the negative equity keep you from getting a car that you want or getting out of a car that you don’t want and getting out from underneath payments.
