Tips on getting a car loan after a bankruptcy
If you’ve been through a bankruptcy, then you know that one of the major concerns for many people is how to re-establish their credit once they’ve done so. The truth is that bankruptcy will impact your credit, and how you are viewed by lenders, for many years after you’ve had your bankruptcy discharged. But even so, you can still qualify for an auto loan if you have had a bankruptcy. This section will give you some tips on what to do to get a car loan after bankruptcy.
The first question to ask is: “Where do debtors stand as far as being able to get an auto loan once they have emerged from bankruptcy?” The answer is generally… “they can get a loan.”
While auto lenders and other financial institutions pulled back on their lending during the financial crisis that began in 2008, more recently, it appears that lenders and finance companies are being more aggressive in their lending. This includes lending to poor and bad credit customers who are in the “subprime” market. As a result, virtually all borrowers, including those with poor credit histories, are finding it much easier to get a car loan than it was a couple of years ago or so.
Along with being more aggressive with lending in general, lenders are also relaxing their standards for extending credit to people who are emerging from a bankruptcy situation. So, if this is you, your chances of qualifying for an auto loan are improving daily.
Note that auto loans are often easier to obtain than credit card accounts once you have emerged from a bankruptcy. The reason for this is that auto loans are “secured” debts. With a secured debt, should you default on the loan, the lender has the legal right to take back the vehicle from you. This reduces their risk.
The following are a number of important tips about bankruptcy car loans:
- Down payments and interest rates
The truth is that most people who are looking for car financing after a bankruptcy are able to get that financing. The problem is that the rate of interest will typically be very high, and the amount of the down payment will as well. Note, however, that recently, lenders appear to want to make more auto loans. This means that consumers who have a bankruptcy on their record will likely be able to get financing at lower rates and with a lower down payment than what may have been required in the past.
But, even if you only qualify for a high interest rate auto loan, the loan is not something that has to remain in effect for years. Once you’ve shown a good pattern of making your payments, you may be able to refinance at a lower rate. This could help you get a lower rate and a much more affordable payment.
- Discharge will usually be required by the lender
Generally speaking, for a consumer who is emerging from bankruptcy to receive any type of loan, the court must have issued an order of discharge. In this case, the bankruptcy may not be over, but the order of discharge will need to be in place.
- Cosigners can help you get a loan
A cosigner can help dramatically in obtaining a better financing deal after a bankruptcy. It can really help your chances for getting a loan if you can find a friend or family member who would be willing to cosign on the loan with you. This will almost always help with obtaining financing and keeping your interest rate down. Note that you will still need to meet income requirements in any case.
- Loan qualifications must still be met or you won’t get financed
When a consumer applies for a loan, the lender is evaluating whether or not the person will repay that loan. This is even more important after a bankruptcy… so having a stable job with the amount of income required to make the payment (after personal obligations) is pivotal if you are to receive financing after a bankruptcy.
- Time helps lessen the impact of a bankruptcy
Lenders view a bankruptcy with less and less skepticism over time. That means that if you do a good job of keeping your credit up after a bankruptcy, then your creditors are more likely to look at your more recent behavior to evaluate your credit worthiness. In general, the first year after filing for bankruptcy is the most important to a lender, and the bankruptcy will have the most negative weight during that period of time. After that first year, your current behavior becomes more important and the bankruptcy less so. But in any case, compared to a person without a bankruptcy, all other things being equal, your credit will not be rated as highly as the person without the bankruptcy.
- Rebuild your credit before buying a car if you can
Generally speaking, if you aren’t in desperate need of a vehicle after getting out of your bankruptcy, you should start rebuilding your credit with less costly financing options first. Vehicles are both expensive and long-term propositions. So it may make sense to rebuild your credit with less expensive facilities before going after a car loan.
- Used vehicles may represent a better overall deal (and help you more)
In general, a later-model, used vehicle with relatively low mileage may make for the best car deal. In many cases, they may still be under warranty, they have most of the “drive-off” depreciation already factored into the price, and they cost less than a new car or truck. Because of all these factors, a used car probably makes more sense than a new one when you have emerged from bankruptcy.
- Work with a lender who knows you
If you have a lender who knows you and knows about your bankruptcy situation, it may make sense to approach them with your financing requirements. This is especially true with a situational bankruptcy where you had a good credit history before the event that created your financial distress. In addition, if this lender has good history with you where you made payments, prior to the bankruptcy, they may be more willing to work with you.
- Do your homework and make a good deal
There is never a reason to “buy fast”… and that is especially true with cars. Since a vehicle purchase is one of the biggest purchases a household ever makes, you need to do your homework and make sure you’re getting a good deal. Don’t be so desperate to re-establish credit that you put yourself in a bad position or end up paying much more than you should. Remember… you are the one who makes the decision to buy… no one else. Do your research and make a smart purchase.