Comparing Bankruptcy Car Loan and an Upside Down Car Loan

Bankruptcy car loans are extended to persons who have a recent bankruptcy on their record and may not qualify for a loan under normal circumstances. By seeking a dedicated bankruptcy loan, these people can obtain high-interest financing and the opportunity to purchase a vehicle. While they often come hand-in-hand, bankruptcy car loans an upside down car loans are very different.

Basics of Upside Down Car Loans

Being upside down on a loan simply means you owe more on the financing than the asset is now worth. It is possible to be upside-down on a mortgage loan if your home has decreased in value. The same is possible on an auto loan. When you go to trade-in your vehicle, you may find the trade in amount you receive is less than you still remain on the loan itself. In this case, you will have to pay off the initial loan and then purchase the new car without the advantage of the trade-in for a down payment. Essentially, you will have negative equity in the car.

It is best to attempt to settle or refinance a loan when you find yourself upside down. Many lenders will be hesitant to do this because they will make less money on the loan than they originally anticipated. However, through negotiations, it is usually possible to modify a loan. 

How are Bankruptcy and Upside Down Loans Confused?

There are a number of reasons why people confuse these two types of loans. One reason for the confusion happens when a car is seized and liquidated by a bankruptcy court. When a court orders liquidation of an automobile, it is usually to pay off the auto loan lender. The court will sell the car and repay at least a portion of the loan. Most car loans are recourse loans. This means the borrower has to pay the difference of the loan amount and the trade in amount if the trade in amount has dropped. In this case, the bankrupt individual will find himself or herself attempting to close an upside down loan.

Another reason the two loans are confused is because a person may need to seek a bankruptcy car loan after exiting an upside down loan. Since there will be no asset to use as down payment, the loan will be very high risk for the lender and the borrower. If the borrower additionally has a recent bankruptcy on record, this means a bankruptcy loan will be necessary. 

The Best Options for High Risk Financing

A bankruptcy loan is a good option for high risk vehicle financing. While the loan will be expensive, it may be the only type of loan a person recovering from bankruptcy is eligible for. Further, when you pay off a bankruptcy loan, your credit score will take a significant step up. Your credit score will increase more, relatively, for a high risk loan than a low risk loan. Taking out a bankruptcy car loan is a great way to start rebuilding your credit when you are in a compromised financial state.

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