June 19, 2008
Auto loan short sales possible?
I want to talk about cars and car loans. I have written a previous article on how and why to avoid car loans but this article talks a little more about it.
Today I have two vehicles, both made by Honda, and they are paid for with cash. I buy used cars, not new. And I only buy a car that I can pay cash for. If I only had $2500 to spend, I'd buy a $2500 car. If I had $1000 to spend, I'd buy a $1000 car. If I had $2000 to spend, I might even buy two $1000 cars so one would run at all times.
I've been in stages of my life where I didn't have the money to buy gas to get home. And I've had a car repossessed twice. Once by the lender. Once by an employer who had given me the car to drive and took it back after I quit. Can't blame them in either situation.
In former days I used to lease my cars. Now I think leasing is mainly stupid. I think the time to lease is when you have a huge amount of cash and just need a business write-off. The tax law favors leasing expensive cars because it limits deductions you can take if you buy the expensive car.
But most people lease or buy using a car loan because they want to drive more car than they can afford. And they look at the other debt slaves driving cars that *they* can't afford and want to be like them. It's human nature.
So now I think paying for a car loan is stupid for most folks and if you are in a situation where you owe more than your car is worth, this may interest you.
How the bank soaks you in a car lease
When the bank writes a lease, they calculate the residual value, based upon a guide called the Auto Leasing Guide. They also typically take out insurance from a third party who guarantees the bank against the vehicle being worth less than the RV. Sort of like private mortgage insurance but for cars instead of mortgages.
Let's assume a vehicle costs $25,000 and you do a 60 month lease, and the residual value is going to be $8000 at the end of 60 months.
If you turn the vehicle in (as I used to do all the time at the end of the leases on my cars) the bank auctions it at a huge auto auction. If the bank gets less than the residual value, the bank makes a claim to the insurance company who insured the residual value. The insurance company (nothing to do with your auto insurance, this is a company that insures the bank not you) then cuts a check to the bank for the loss.
But let's say you trade in a vehicle instead. You trade it in before the end of the lease.
The dealer will pay you what he thinks the car or vehicle will sell for, less a fat profit margin. So you may end up with $3000 or $4000 in "negative equity". This is added on to a new loan and you now are upside down $3000 on a new vehicle.
This is the basically same for cars people purchase rather than lease. And it is possible to do a short sale on a car to get out from under.
Is a vehicle short sale possible for a car?
I was stupid when I had my cars repossessed. I should have called the car lender and told them I was going to do a short sale.
When you have a car repossessed, or when you turn it in before the end of the lease term, the lender is going to give you dirt for the car. You are not getting fair value. It's worse for a repo because the lender will make you pay the repo fees. And the car will be sold at auction.
Ever buy something at a car auction? All you get to do is look at the car and bid. You don't know who owned it or anything about it. A car auction is a great place to buy a car and a horrible one to sell a car. When buyers buy at a car auction, they do so keeping in mind that things could be wrong with the car. So they bid low.
If you turn a car back in to the dealer or the bank, or have a car repossessed, you are doing things wrong. What you should do is this. Sell the car to someone privately, using Craigslist. Tell them the lender has to approve. And then talk to the lender and tell them you have a buyer, you don't have the money to pay the full loan, and need to do a short sale.
The lender won't agree unless you are behind in your payments. If you are really behind they will repo the car. So you might want to do this when you are only a little behind, maybe 30 or 60 days.
The lender gets all the money, and your liability is reduced. In the example I used, instead of $5000 you get the full $8000 for the car, and the lender gets their loan paid back.
This is the smart way to handle a lease or car loan you can't afford anymore and where you are "upside down." It isn't as easy as letting the car get repossessed, or turning it in, but it makes a lot more financial sense. Sell the car yourself, get a retail deal and give the money to the bank.
As always, they may come after you for the deficiency. But the deficiency will be far less than it would otherwise. And you can negotiate with them and pay this off. Meanwhile, pay cash for your next car.
I'd love to hear your comments about your car lease or loan experiences. And remember, I'm just some Guy on the Internet so don't listen to me. Get real advice and follow what you think is right.
Turn tragedy into opportunity. Learn how to do short sales for your clients and for yourself.
Please watch this video on short sales and foreclosures. This is a screen shot — just type in your email and I'll get you to the real video. It's geared to homeowners and Realtors who want to know everything they can about short sales. And it is the tip the iceberg…
photo CC license by http://www.flickr.com/photos/williamhook/ and http://www.flickr.com/photos/speakeasyx/
16 Comments on Auto loan short sales possible? »
June 19, 2008
Richard Geller @ 9:08 am:
So please leave your comments here about experiences or problems with car loans and car leases. Thanks
–Richard
Brian Kurtz @ 10:56 am:
This is some GREAT information. I work short sales each and every day to help people avoid foreclosure on their homes. Being in the business I always wondered if it would be possible to "short sale" a car loan.
Looks like the possibility is there. Pretty much nobody knows about this. It's almost a buzz word in real estate now, but for cars? Nobody is talking about it. I should do an episode covering this on The Short Sale Show in the near future. The show can be found at http://www.ShortSaleShow.com
September 22, 2008
Victor Antablian @ 8:44 am:
Hey - thank you for the good article on short sales for your car. I have a 2007 Infiniti QX56 which I can't afford the payments on - I don't want my credit hurt, but you mentioned that it would be good to be 30-60 days late. Do I call them up and find what the payoff is? And then post it for sale? I'm assuming once I have a buyer I explain to them that it has to go through the financing company and that's when I call them up to negotiate? Thanks again for you help.
Vic
October 17, 2008
Jon C. @ 3:49 pm:
Interesting. I have never heard of short selling a car note. I think short sales are a great way to stick it to the bank and if it works, great!
January 20, 2009
Hildred Mere @ 5:26 pm:
Hi,Richard
I have a Honda Odyssey 2007
February 11, 2009
yvonne @ 2:30 am:
if i short sale my dually i am i the red for about $15,000 and the banks wont work on the interest rate, just cant afford my payment any more. The truck loan and title is in my name only but i am married. will they bring my husbands credit in this also. i also have other vehicles with my name on title i own out right will they attache on liquide assets personele property or realeastae and bank accounts. Also will they attache a lein? Are there any forms or a web site that explains better or should i consult a bankrupcy lawyer to help more. Please help!! Broken hearted/broken bank
I always advise people to consult a lawyer. A bankruptcy lawyer is a good idea, but filing isn't necessarily good, in fact is often a bad idea.
You can always file later if you have to. Most of the time you don't have to and are better off not.
Best option is to find a buyer for the truck, and get the bank to agree to the sale. They will hold you responsible for the deficiency. But it will be far, far less that you owe, than if they repo the car, or even if you turn it in, because they sell it at auction and get a dirt cheap price for it.
Then you can sign a note for some of the deficiency, or all of it, or none of it…and you can negotiate. They have to sue you to be able to go after your other vehicles and it is not easy or cheap for them necessarily.
If your husband didn't sign the note, I can't see how he can be held liable, but check with an attorney.
warmly
–Richard
Nicholas @ 11:42 am:
Hi, I only found this article after the bank offered me this 'Short Sale' option. So doing some research I came across this article. I am right now currently working with a local dealership and seeing what type of written bid I can get. I am extreamly unside down with this car, and do not believe they will take the bid for a settlement offer. On the other hand, if they take the offer and have me work some type of deal out to make up the difference, I still believe I will be in a much better position then if I just had it repoed. For 1 I will get more then they would at auction, 2 it won't go as a repo on my credit and 3 I would have to pay the difference anyways. So I am commenting on this article to say I commend you on sharing this information. If I would have had this information earlier, it would have saved me hours and hours on frustrating phone calls pressing 1 for this option, and 3 for that option to finally speak with the wrong person who then transfered me to someone's voice mail to leave a message to call me back, but later find out they couldn't call me back without my customer number that I didn't have. I also agree with your advice, buy a car you can afford and save yourself the trouble! Really you have to ask yourself this simple question, what is more embarrassing, having your neighbors see you driving a 6 yr old car with a small dent in the door or having your neighbors see the bank come and tow your super nice car away and having to explain why it is being towed.
You make excellent points. I think you are very smart. Don't get it repo'ed, and don't turn it in. Sell it and have the lender get the proceeds, and you will owe far less. Then you can negotiate this based upon your financial situation.
I love my paid-for cars! I think it's awfully stupid when a neighbor buys a new car on credit. They are buying a losing asset with borrowed money. Really not a good idea. I hope people can be big enough to drive an old wreck, fully paid for, and hold their head up high. We shouldn't have to depend upon a car to make ourselves feel good about ourselves, right?
warmly
–Richard
May 18, 2009
Vince @ 11:09 pm:
Great info!! It also made me chuckles that it's possible to do short-sale on autos. I'm currently working with my lender on a short-sale of my home and I will be short-selling my car as well. Thanks!
Oh, do you have any tips on how to negoiate with the credit card company to bring down the amount owed besides going through with a debt negotiator company? I was think of doing it myself and hopefully eliminate more than 60% of the debt and also to avoid paying third party fees which would likely be added to the settlement.
Thanks again..
November 12, 2009
latasha frierson @ 11:16 am:
my car in upside down in value and it needs repairs that are not worth the money and the note and i can't afford it anymore. what are the steps to take to get a short sale done on my car? please advise!
January 21, 2010
AL @ 11:41 pm:
I am upside down on my Van I owe 12,500 on it. and its worth about 7000. I was advised to call my lender and tell them I can no longer afford the payments due to cut back in hours at work. I just got a settlement for 11,500 and I want to make and offer of 5000 and work from there if I have to pay 7000 its okay but no more than that. I was also advise to say that my van needs repairs altenator, tires and brakes and to give them hire miles on it than it actually has. Do you think I stand a chance. I been paying my loan for almost 5 yrs. Please advise
January 24, 2010
Travis @ 8:57 pm:
Very good info. I have been laid off twice in the past year and unemployment is denying my benefits for reasons I will never understand. I'm VERY upside down on my loan, (I know, i'll never do this again), and would like to attempt a "short sale". Other than finding a buyer, contacting my lender, and negotiating, is there any other advice I should know about?
Thanks, Travis
February 5, 2010
MANUEL @ 3:37 pm:
Hi, I have a car loan for a 2007 VW rabbit
the car is in great conditions and all but I am moving to the north and don't need and want to take my car up there so i want to get rid of it because I dont want to deal with loan payments…. do u think a shortsale is convenient?
February 26, 2010
Rachel @ 9:45 am:
I am considering a short sell on my '05 Nissan Altima. I am about $9500 upside down on it. I called my lendor and they informed me about the process. It is most assuredly better to go through the trouble of selling the vehicle privately. One thing that I did not see mentioned in this article or in the comments is the fact that, according to my lendor, a short sell of a vehicle DOES go on your credit report as a repo. It will remain on there for the standard 7-10 years. After that time, it will become a charge off. You are absolutely responsible for the remaining balance on the note after the sell of the vehicle. Failure to pay that difference (either in a lump sum, monthly payments, or negotiating a settlement) can result in liens on your assets and/or garnishment of wages. In Texas, we have a community property law that would allow for your spouses assets and wages to be affected also. All told, there is much to consider in a short sell.
March 4, 2010
Crystal @ 7:50 am:
Does anyone knw of anyone that has had a successful Auto Short Sale…….are there any outsourcing companies that do this for you.
Crystal @ 7:51 am:
Has anyone heard of "Hope for Car Owners" www.carloanmod.com is this a legit company?
March 18, 2010
Lyn @ 10:11 am:
Yes I have heard of Hope for Cars and I am thinking of going with them does anyone know this company? I would like to short sale my car and I need the help.