Deficiency balance is a term that many people may not be familiar with, but it can have serious consequences for those who find themselves facing it. Simply put, deficiency balance refers to the amount of money that remains on a loan after a lender has repossessed and sold whatever collateral was used to secure the loan. This can happen in situations such as auto loans or mortgages.
For example, if someone takes out an auto loan and then stops making payments on it, the lender may repossess the car and sell it at auction. However, if the sale price of the car is less than what is still owed on the loan, there will be a deficiency balance – meaning the borrower will still owe money even though they no longer have possession of their vehicle.
One of our panelists mentioned that deficiency balances are more common than people might think. In fact, according to Experian’s State of Credit report from 2019, over 20% of all auto loans had negative equity – meaning borrowers owed more than what their vehicle was worth at trade-in time.
So why does this matter? Well, having a deficiency balance can lead to serious financial problems for those who may already be struggling to make ends meet. Not only do you lose your collateral (such as your car), but you could also end up being sued by your lender for the remaining debt – which could lead to wage garnishment or other legal action.
However, there are steps that borrowers can take to avoid finding themselves in this situation in the first place. One option is gap insurance – which covers any difference between what you owe on your loan and what your insurance company would pay out if your car were totaled or stolen. Another option is simply making larger down payments when taking out loans so that you’re starting off with less negative equity from day one.
In conclusion, while many people may not be aware of what deficiency balance means or how it works, it’s important to understand the risks involved. Borrowers who find themselves facing a deficiency balance should seek out legal advice and explore their options for resolving the debt as soon as possible. And of course, taking steps to avoid finding yourself in this situation in the first place is always preferable – whether that means buying gap insurance or simply being more cautious about how much you borrow and how quickly you pay it back.