Introduction:
In the ever-evolving world of vehicle financing, a concerning trend has emerged, as reported by Kelly Blue Book, the authority on vehicle values. Car loans on used cars are skyrocketing to 125% of the car’s value, leaving many owners buried in negative equity. In this blog post, we delve into the reasons behind this unsettling phenomenon and explore a potential solution: the car short sale.
The Alarming Reality: 125% Loans on Used Cars:
The scenario painted by Kelly Blue Book is disconcerting. A $10,000 car could result in a staggering $12,500 loan, and if you set your sights on a more typical $20,000 to $25,000 vehicle, the loan could escalate to eye-watering amounts. What’s even more alarming is that these figures don’t account for depreciation or the inevitable drop in value after driving the car off the lot.
The Burden of Negative Equity:
Many car owners find themselves in a situation known as being “upside down” or having negative equity. This occurs when the amount owed on the car surpasses its current market value. If you own a vehicle with a loan, chances are you might be one of them, unless you are in the final year of your payment term.
Root Causes of High Loan Values:
Understanding why cars are being sold with loans at 125% is crucial. Financing taxes, adding warranties, and rolling over negative equity from previous vehicles are common culprits. Dealers marking up prices above book values also contribute to the inflated loan amounts.
The Short Sale Solution: Learning from the Housing Crisis:
Just as the housing crisis prompted short sales for homeowners with mortgages exceeding their property value, a similar solution exists for car owners. Many banks have official procedures for car short sales, providing an avenue for those struggling with high loan values.
How to Execute a Car Short Sale:
If you find yourself burdened by an overpriced loan, a car short sale could be a viable solution. Banks often have established processes requiring specific documentation, such as a condition report and a title check. Demonstrating financial hardship and proving the vehicle’s value are key steps. A well-organized and professional application increases the likelihood of approval.
Benefits for Banks and Owners:
Banks may prefer a short sale over repossession, as it saves them the costs associated with repossessing, transporting, and auctioning a vehicle. For owners, this can be a lifeline, helping them shed the financial burden and move forward with more manageable payments.
Conclusion:
While the surge in car loan values is indeed troubling, understanding the root causes and potential solutions is crucial. A car short sale might not be the first option that comes to mind, but it could be a game-changer for those grappling with exorbitant loan amounts. As a consumer, being aware of the potential pitfalls when purchasing a car is essential to avoid the long-term consequences of negative equity. Consider exploring a car short sale as a legitimate and legal way to break free from the shackles of high car loan values and regain control of your financial well-being.