Does an Upside Down Car Loan Affect Your Credit Score?

Upside down car loans are vehicle loans whose amount owed is more than the value of the vehicle that the loan was used to purchase. This happens when a vehicle’s depreciation falls at a faster rate than anticipated while the interest rate on the loan is higher than current interest rates. This situation, which may be temporary depending on interest rates, will have some affect on the credit score of the borrower.

What Is Being Upside Down on a Car Loan?

Borrower who are upside down are in a position where they owe more than what the car is worth. This position may affect the borrower’s credit score if the borrower is unable to maintain the payment on the vehicle as scheduled or is unable to refinance the loan at a lower interest rate. Failing to maintain the car payments will result in a negative report to the borrower’s credit report and lower their credit score.

How to Avoid Going Upside Down

Being upside down on a car loan can happen if the borrower does not put an adequate amount down on the loan or is caught in a situation where loan interest rates rise too quickly. Knowing when to borrow and borrowing an amount that is manageable will help lower the possibility of going upside down on the loan and negatively impacting a borrower’s credit score.

 


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