Rising Concerns Over Car Loans
More and more car owners are finding that their car loans are becoming a serious liability. Whether it’s the payment being too high or the debt itself, they’re running into problems. So, what do you do about this? Over the last three years, new and even used car prices have skyrocketed. Many people bought cars with payments of $700, $800, $900, even $1,000 a month. Not only that, but the amount financed is sometimes extraordinarily high compared to the vehicle’s value. So, what’s happening?
Car Owners Facing Negative Equity
Now, after a couple of years, people have cars that are two years old, with maybe 50,000 to 60,000 miles on them, but they’re still paying $800 or $900 a month. Inflation has kicked in with gas prices, grocery prices, and rising insurance premiums. Meanwhile, their wages might not have increased accordingly, leaving them unable to afford the car payment. When they try to sell the car, they find out they owe more than it’s worth. For example, you may have bought the car for $45,000, still owe $35,000, but it’s only worth $30,000 or $28,000. What can you do?
Exploring the Vehicle Short Sale Option
One option is to give the car back and let it be repossessed, but that would damage your credit. A more common solution now is a vehicle short sale, a process similar to real estate short sales in the 2000s. In a vehicle short sale, you work out a deal with your lender. The first step is presenting three key pieces of information to the lender.
Proving Financial Hardship
First, you must show that you can’t afford the payment. You’ll need documentation of your income and expenses to prove you’re in financial distress and not just trying to escape a payment you could manage if necessary. If your income is lower or your expenses are higher, this will help your case.
Demonstrating the Vehicle’s Value
Second, you need to demonstrate the vehicle’s value. If you owe $30,000, but the car is only worth $22,000 or $23,000, the lender will recognize that they’ll lose money if you stop paying. They might be open to a short sale to minimize their losses, rather than repossessing the car and getting even less for it at auction.
Putting Together a Short Sale Proposal
Finally, you need to propose a deal. For example, if you owe $30,000, but you find a buyer willing to pay $25,000, you can ask the lender to accept the sale and release the title to the buyer. The lender will want to ensure it’s an honest third-party transaction, not an attempt to lower your loan.
Why Lenders May Consider Short Sales
Lenders may prefer a short sale over repossession because it saves them money on repossession, transport, auction fees, and the lower wholesale price. If they repossess a car worth $22,000, they might only get $18,000 at auction, losing even more money.
Negotiating the Deficiency
If you sell the car for $25,000 but owe $30,000, you’ll have a $5,000 shortfall. You can ask the lender to waive this deficiency in exchange for facilitating the short sale, though they may or may not agree. Even if they don’t, getting out from under your $900 payment is still a win, and the $5,000 can be paid off over time.
Benefits of a Vehicle Short Sale
In the worst-case scenario, you’ll owe less than you would after a repossession. You might also avoid having a repossession mark on your credit. Lenders sometimes allow payment plans, such as $100 a month for four years, making it more manageable than paying $900 a month.
Conclusion: Vehicle Short Sales as a Solution
A vehicle short sale is an underused strategy to minimize liability on a car loan. Not every lender advertises this option, as they only want to use it when necessary. However, it’s worth looking into with your lender or visiting carshortsale.com for more information.
