The Benefits of Upside Down Car Loans

Upside down car loans occur when a borrower owes more on a car than what it is worth.  This situation is bad for borrowers because they are in a position of paying for an asset that has depreciated in value at a rate that is faster than they can pay for it.  This may result in a higher rate of default and ultimately affect the credit score of the borrower.

With this in mind, how might an upside down car loan benefit a borrower or what are the benefits of an upside down car loan?  There are not many, if any benefit that a borrower can derive from being upside down on a loan.  Borrowers who find themselves in a situation where more money is required to service a loan on a severely depreciated asset are more apt to seek refinancing opportunities if available or walk away from the loan altogether.

A borrower who finds themselves upside down on a car loan may want to use it as an opportunity to alter some of the terms of the loan in order to continue making payments and avoid going upside down on a car loan.

Lower Interest Rates

A borrower with a loan that is about to go upside down should attempt to refinance the loan in order to lower their interest rate. An upside down loan creates credit concerns and can affect the borrower’s credit rating.  Negotiating with a lender over the interest rate of the loan my provide relief and prevent the loan from going upside down.

Adjust Loan Terms

A lender may be willing to change some of the terms of the loan, including increasing the payment period in order to allow a borrower going upside down to maintain the loan and continue to make payments.  Having a loan default does not serve the interests of the borrower or the lender and the lender may be more apt to redo the terms than allow the loan to default.

An upside down loan has no benefits for a borrower who finds themselves with one.  Being proactive and seeking opportunities to change interest rates or adjust the loan’s terms may be some of the ways to take advantage of an upside down loan.  Negotiating the terms of the loan upfront and understanding the potential costs and impact of interest rates will help keep the loan from becoming an upside down loan.


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