How to Sell a Car When You Owe More Than It Is Worth in Alberta

Your payout letter says one number. The best offer you can find says a smaller one. The difference is the shortfall.

It does not stop you selling the car. Close to a third of the sellers we buy from owe more than the vehicle is worth, and those sales close the same way every other sale does. The lender gets paid in full, the gap gets covered, and the car goes. The only real decision is how you cover it, and that decision deserves more thought than the sale itself.

How much are you actually short?

Two numbers, subtracted. Neither of them is the one in your head.

1. 1Get a payout letter, not your app balance. Call your lender and ask for a payout or lien letter. It states the exact figure needed to close the loan through a given date, and it is not the number showing in your banking app. Here is how to get one.
2. 2Get a real offer on the car. Not a listing price, not what a similar one is advertised at on a dealer lot, and not what you paid for it. A number somebody will actually hand you, priced on kilometres, claims and condition rather than on what is left owing.
3. 3Subtract. What is left is the shortfall, and it is the only figure the rest of this depends on.

Do both before anyone comes to look at the car. A shortfall you found at your kitchen table is a decision. The same shortfall found in your driveway with a buyer standing there is a pressure tactic, even when nobody meant it that way.

What happens at an Alberta closing when you are short?

Nothing in the sale can route around the lender. The loan is registered against your VIN in Alberta's Personal Property Registry, and a registry agent cannot complete a transfer while that registration is live, so the gap is not something you and a buyer can agree to settle between yourselves after the car changes hands. A loan on the vehicle is one of the two things that most often sends somebody home from a registry counter. Unpaid tickets are the other.

What that means in practice is that the money moves in one place, on one day, in a fixed order. The payout figure comes from your lender, a draft for that amount goes to the lender, and only what is left once the loan is closed is yours. When nothing is left, the order does not change. The difference is yours to supply, and it has to be there while the loan is being paid out rather than promised for afterwards.

It is also why a financed sale happens inside a branch rather than in a driveway. Ours run about an hour and a half when there is a loan on the car, and most of the extra time over a car with nothing owing on it is the queue at the counter. The full sequence, from payout letter to lien release, is here.

What are your options if you owe more than the car is worth?

There are four. Everybody in this position picks one of them, usually without being told there were four.

• Cover the gap. Sell the car, the loan closes in full, you pay the difference from your own funds, and you are finished with it.
• Roll it into the next loan. Sell or trade, and the unpaid balance is added to the financing on whatever you buy next.
• Keep the car. Do nothing, keep paying, and wait for the gap to close on its own.
• Hand a lease back. If it is a lease rather than a loan, ending it early and returning it at the end of term are two different transactions at two very different prices.

Only the first one ends it. The second moves it forward with interest attached, and it is the option you will be offered most often, which is the opposite of what that should tell you.

What does rolling negative equity into a new loan cost you?

More than the shortfall, and the cost is built to be hard to see.

The mechanic is the same every time. You are asked what monthly payment you are comfortable with. That figure can be made to fit almost any car, because the term is the adjustable part: forty eight months becomes sixty, sixty becomes seventy two, seventy two becomes eighty four. Your old shortfall is added to the amount financed on the new car, the term is stretched until the payment lands where you said it should, and you sign something that feels like it solved the problem.

It did not. The trade's own long standing rule of thumb is that a car financed with nothing rolled in and roughly ten percent down still takes about three years of payments before you break even. Start that clock already carrying a shortfall from the last car and you are underwater on the new one from the first day, for longer than you were on this one.

So there are only two numbers worth asking about at a finance desk: the total amount financed, and the number of months. A monthly payment answers neither of them.

Is it cheaper to keep the car?

Sometimes, and it is worth checking rather than assuming, because being underwater is a temporary condition by design. Every payment takes principal off while the car keeps depreciating, and the two lines do eventually cross. If your gap is small and your remaining term is short, waiting it out can cost less than closing it.

It stops being the cheaper answer when the car is the thing that is moving. A vehicle heading into repairs worth a serious fraction of its value, or one coming up on the kilometres where it gets harder to sell at all, loses ground faster than the loan gains it. A car past about 130,000 kilometres is noticeably harder for us to move, and harder to move always means less money.

The test is a month against a month. What does one payment take off the principal, and what does another month of age and kilometres take off the car? Whichever of those is the bigger number is the one making this decision for you.

What does DriveOffer do when the payout is bigger than the offer?

We work the shortfall out before anything is booked. We check what is registered against the VIN at our end, and if the payout figure comes back bigger than the offer, you are told the difference in dollars, and what you would need to bring, while the decision is still entirely yours to make. Nothing about it gets discovered on the day.

Here is how the offer itself is put together, if you want that half of the arithmetic in front of you before you call your lender for the other half.