Troubling Car Loan Trends
Well, this is very troubling. According to Kelly Blue Book, the authority on vehicle values in the vehicle market, car loans on used cars are now 125% of the car’s value. For example, if you bought a $10,000 car (which there’s very few of anymore), the loan on that car would be $12,500. If you go to a more likely price point of let’s say $20,000 for a car (which still there’s not a lot of used cars that are good for $25,000 or $20,000), the loan on that $20,000 car would be $25,000.
Deeper Financial Impact
Now, that might seem extreme, but it’s worse than that. Because this is if you look at the bottom loans, people are taking out a loan on a car that’s not after you drive it off the lot, that’s not after depreciation, that’s not on a new car, a car that you drove home and now it’s dropped in value after a year. This is what they’re taking out on a car, so after you’ve driven it for a couple of months and that value drops down, it’s going to be even worse than 125%.
Being ‘Buried’ in Car Debt
Many people are what’s called buried in their car, upside down, out of equity, negative equity. You probably are one of them if you own a vehicle that has a loan on it. Unless that loan is in the last year of you making payments, you probably owe more than it’s worth. How does this happen?
Understanding the Causes
And we’re going to also talk about how to get out of these loans if you have one of these high negative equity loans or upside-down loans. There may be a way for you to get out of this loan we’ll talk about here in a minute. But why is a car that’s sold placed with a loan of 125%? Well, a lot of times people are financing their taxes, right? Tax on most vehicles is 7 or 8%. Sometimes they’re financing things like warranties or other add-ons by the dealer. And in many cases, they’re financing the negative equity from their last car. Whatever you traded in might have negative equity, and that gets rolled into your new loan. Those are the reasons why.
Impact of Dealership Practices
Or the car just could be selling for too much. You know, if the dealer marks up the car a TH or two over the book value, that now goes on top of your loan. So cars as soon as they’re rolling out of the showroom already have at least 125%, and maybe more, based on depreciation.
Strategies to Mitigate
So what can you do to get out of one of these loans? Well, remember back in 2008, there was the housing crisis and people had houses that they owed more on them than they’re worth, and they were doing short sales. Well, there is a method where you can do a short sale on a vehicle. Many banks have this as an official procedure in their loan underwriting manual. So if you have a loan with a bank and you’re having trouble paying it or your payments are too high (many of these used cars have payments $700, $800, even $1,500 or $1,600 a month), how do you get out from under that payment?
Short Sale Option
If that car that’s $20,000 in the book, you owe $25,000 on it, you can’t sell it because you can’t get the title until you pay off the $25,000. Many banks have a procedure where you can do a short sale on that loan. You have to jump through a few hoops. You’re going to have to get a condition report on the vehicle, probably a title check on the vehicle. You’re probably going to have to show that your income can’t afford it. You’re probably going to have to show what the value is.
Process and Documentation
But if you go through all those steps, and here’s a quick checklist on the screen: Car Short Sale Documents – what you need to put together (and you can get more on our website, carshortsale.com), you can apply to the bank and have them review your file. In many cases, they would rather do a short sale than have to repossess the vehicle, ship it to an auction, do reconditioning, do transport, pay repo fees because that’s going to cost them another $3,000 or $4,000.
Negotiating with Banks
So if they already know you have a sale lined up, if it’s a reasonable amount near the book value, many times you can request that. It’s up to the bank to ultimately do it. But if you put that package together very organized, very professionally, you have the best chance of the bank saying, “Alright, this is a better way for us to go because we can see that this vehicle is really a burden on us as much as it is to that person.” So don’t rule out doing a vehicle short sale.
Financial Implications
But be aware when you’re buying your car, you might be buried upside down, out of equity, negative equity from day one. And this is a burden on consumers, not only for your personal net worth because your negative equity affects your net worth, but your payments are going to be really high. And sometimes that makes it tough to buy everything else you need in your life – your rent, your mortgage, your food, groceries, taxes, insurance, everything else is tough when you have an overburdened car payment.
