How to Sell a Car with Negative Equity

A car with negative equity has depreciated in value since the financing for the car was approved. The borrower that does pay off the financing at a fast enough pace, may find the value of the car has sunk below the sum that remains on the loan. When the car is sold, the borrower will not be able to cover the loan difference with the proceeds. This is also called an upside down car loan, and it is challenging to sell an upside down asset without losing a substantial sum.

Sell the Car and Pay the Difference

The simplest way to sell a car with negative equity is to simply sell it then pay the difference on the loan. Whatever that difference is, whether $100 or $10,000, will be a loss the borrower has to pay off. Unfortunately, most car loans net a loss in equity to the borrower. The assets depreciate very quickly, and they are worth much less at the end of a loan than they are at the beginning. However, the cost of leasing a car is so high that the borrower can still net savings on the loan. When a borrower considers a loan on these terms, the borrower may find the negative equity does not represent as large a loss as initially expected.

Settle the Debt First

One option many pursue when attempting to mitigate losses is debt settlement. With debt settlement, the borrower pays off a large portion of the loan in one lump sum. This sum is lower than the actual amount that would remain on the loan if it were to be paid off in full. A borrower that has the cash to do this will see the greatest benefits. It is also possible to take out a settlement loan in order to pursue this option.

Unfortunately, this option comes with the most penalties to a borrower's credit. The lender reports the borrower for settling the loan instead of keeping the loan contract. This consequence must be balanced against the potential savings to determine if settlement is the right option. The car can then be sold to pay off the loan at the settlement quote.

Modify the Loan Contract First

One option that may mitigate losses without severe penalties is loan modification. Loan modification allows a borrower to directly alter the contract for a loan with the lender instead of using a third party. In this case, the borrower will have to offer the lender sufficient reasons to accept the change. It is potentially the hardest route, but it can represent the biggest savings.

A borrower with negative equity can seek to readjust the terms of the loan to higher monthly payments or a lower interest rate. By doing so, the borrower can hope to build equity in the car up faster than he or she is currently doing. If this rate outpaces the rate of depreciation in the car's value, the borrower will get back into the positive eventually. The car should only be sold once positive equity is gained or the borrower at least breaks even.


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