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Overview
If you try to sell your car and you still owe money for it, and it has a lien on it from the lender, it can be sold but not without its share of peril. But do remember that you're not the first person in this situation. Whether you can no longer afford the payments on the car because of a loss of job or other financial hardship, or it is a lemon that requires more repairs than it is worth, keep your wits about you as you look for a solution to the problem of selling it.
Causes
There are a lot of reasons why you may be "upside down" on your car. "Upside down" is car dealer lingo for owing more on your car than it is worth. First, to sell more cars, manufacturers are offering more new-car incentives that cause their cars to depreciate faster. Furthermore, instead of financing cars for 36 months, buyers now opt for loans as long as seven years to keep their payments down. Finally, car buyers today are less likely to put as much as 20 percent down on their purchase which would help protect them from depreciation. For that reason, recently Edmonds.com estimated that the amount of negative equity in automobiles was almost $4,000.
Considerations
The most painless way to dispose of your car is to trade it in for a new one. But car dealers are notorious for either increasing the price of the new car or reducing the value of your trade-in, resulting in your not receiving what your car is worth. A better way is to sell your car on your own. But it takes considerable work and it is a bit tricky to do, especially if you still owe money on it. Start the process by contacting your local Department of Motor Vehicles for information about the procedures and paperwork needed to sell your car. Then check with your lender to find out what you must do to get the lien released on the vehicle because it must happen when you transfer the car to the new owner.
Finances
Most buyers will not seal the deal without having a clean bill of sale. If your lender is local, suggest that the buyer meet you at the lender's office to complete the sale, assuming that the lender has possession of the title and is willing to release the lien when he has received money to pay off your loan. If not, or if your lender is out of town, your only recourse is to arrange a short-term loan to pay off the car. If you do not have the resources, consider taking out a personal loan if your credit is good. You could also borrow from your retirement plan at work but there is a risk. For whatever reason, if you are terminated, you will be required to quickly pay back the loan. Failure to do so will possibly trigger penalties and high taxes. And as the last straw, you could get a cash advance on your credit cards, although the interest rate on most of them is extremely high.
Plan B
Considering the complexity of selling the car yourself, you may decide simply to take your lumps and trade your car in on your new one. In fact, you may be able to find a dealer offering rebates that may be the answer to your prayers. For instance, in a depressed economy, it is not unusual for dealers to offer rebates of $5,000 or more on certain automobiles. If you are "upside down" on your present vehicle by $3,000, you can offer the other $2,000 as a down payment. But understand that rebates aren't manna from heaven. If the car you buy for $25,000 comes with a rebate of $5,000, it is really worth only $20,000 and that fact will be reflected at the time you try to sell it.
Prevention/Solution
There are four things you should consider when you buy your new car.
1. After doing a lot of research, bargain hard for your new car.
2. Put at least 20 percent down on your new car.
3. Do not finance your car for more than 48 months, 60 months at the most.
4. Make sure your monthly payment does not exceed about 20 percent of your net income.
