How To Get Out Of High Car Payments

  • December 8, 2023
  • 3 min read

According to Kelly Blue Book, a leading authority in vehicle values, car loans for used cars have surged to 125% of the car’s value. Even a $10,000 car, which is increasingly rare, could result in a loan of $12,500. Higher-priced used cars, typically around $20,000 to $25,000, amplify this trend further. These loans aren’t reflective of depreciation; they’re the initial loans taken out on these vehicles.

Being ‘Buried’ in Your Car Loan
A significant number of individuals find themselves in a state of negative equity, commonly known as being ‘buried’ in their car loans. Unless you’re in the last year of payments, chances are you owe more on your vehicle than its current worth. How does this predicament arise, and more importantly, how can you navigate your way out of it?

Factors Driving Excessive Loans
Multiple factors contribute to this staggering loan-to-value ratio. Financing additional costs such as taxes, warranties, or add-ons, along with rolling over negative equity from a previous car, are primary reasons. Moreover, dealers sometimes inflate prices above the book value, exacerbating the loan burden from the outset.

Escaping the Grip of Negative Equity
Similar to housing short sales during the 2008 crisis, there’s a potential method for cars: a vehicle ‘short sale.’ Many banks have formalized procedures for such scenarios. If you’re struggling with high payments or financial strain, this could be a viable option.

The Process of a Car ‘Short Sale’
Executing a car short sale involves several steps. From obtaining a condition report and a title check on the vehicle to demonstrating financial incapacity, the process requires meticulous preparation. Organizing the necessary documents and presenting a comprehensive package to the bank improves the chances of a successful negotiation.

Potential Relief for Both Parties
Banks often prefer short sales over repossessions due to the associated costs. By showcasing a well-structured proposal aligned with the vehicle’s actual value, you may persuade the bank to opt for a short sale. This approach could be a win-win, relieving you of an overburdened payment while also alleviating the bank’s financial strain.

Consequences of High Car Payments
Aside from affecting your personal net worth, high car payments can significantly impact your ability to manage other essential expenses. Rent, mortgage, groceries, insurance, and taxes can become increasingly challenging to handle when a substantial portion of your income is tied to car payments.

Navigating out of an upside-down car loan is a daunting task, but it’s not insurmountable. Understanding the reasons behind these inflated loans and exploring avenues like short sales can provide potential relief. Car payments shouldn’t overshadow your overall financial well-being, and exploring these options might bring a much-needed respite.

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