Getting a car loan after bankruptcy is possible. More than half a million people declared bankruptcy in each of the last five years, according to the Administrative Office of the U.S. Courts — and life doesn’t stop after the papers have been filed. Driving may be necessary to get to work, buy groceries and pick up kids. Securing an auto loan after bankruptcy may be difficult, but you do have options.
- Car loans after bankruptcy: Chapter 7 vs. Chapter 13
- How to get a car loan after bankruptcy
- Where to find auto loans after bankruptcy
- Factors to consider when getting a car loan after bankruptcy
- 4 tips to increase your approval odds after bankruptcy
Car loans after bankruptcy: Chapter 7 vs. Chapter 13
Bankruptcy laws exist to help people who are carrying an insurmountable debt load. The two most common types for individuals are Chapter 7 and Chapter 13.
A Chapter 7 bankruptcy is designed to provide a fresh slate. A bankruptcy trustee will sell any asset you own during the bankruptcy proceedings to repay your debt — this includes any vehicles, unless a vehicle qualifies for an exemption. If you need to purchase a new vehicle, however, it’s best to do so after your bankruptcy has been finalized, which can take four to six months to complete. Purchasing a car, or otherwise acquiring assets beforehand, can be a sign of fraud.
A Chapter 13 bankruptcy is designed to help consumers pay off their debt. It sets up a payment plan and prevents debt collectors from pursuing further debt collection methods. If you have income and your creditors agree to a payment amount that’s affordable for you, you’ll likely be able to keep your car by making your Chapter 13 payments. You may also be able to purchase a vehicle during a bankruptcy if you receive permission from the court. When the process is over, you can finance a vehicle without needing court permission.
How to get a car loan after bankruptcy
If you have a bankruptcy on your credit report and are looking to get a car loan, here’s how to increase your likelihood of success.
1. Check your credit.
Your credit score was likely impacted by the bankruptcy proceedings (more on that below), but make sure there are no errors on your credit report that could drag your score down even further. According to the Fair Credit Reporting Act, you can access a copy of your credit report for free every 12 months from each of the credit bureaus — Experian, TransUnion and Equifax. AnnualCreditReport.com is the only federally-approved website that provides access to all three reports, which are currently being offered weekly.
2. Set your budget and save for a down payment.
Experts advise that you don’t spend more than 10% of your budget on transportation costs. Car loan calculators can help you identify how much car you can afford and what your potential car payments will be. Saving for a down payment will also help you get more favorable terms. Experts generally recommend putting down 10% or higher to help you get the best rates and prevent your car loan from going underwater.
3. Compare cars.
Once you’ve identified your price range, look for vehicles that are practical for your lifestyle. Since your budget and credit score will be top of mind, you might have the most luck buying a used car versus a new one.
4. Shop around for lenders and get preapproved.
When looking for a lender, check with your local bank or credit union to see if they offer bad credit car loans. Before you head to the dealer, apply to several lenders and get preapproved for financing. This way, you’ll have an approval already and you’ll know your loan limit before you have to deal with a salesperson.
5. Review and sign the paperwork.
Your lender or the dealership finance manager will walk you through the paperwork, including any potential dealer fees. Review everything and make sure it’s what you agreed to before signing on the dotted line.
Where to find auto loans after bankruptcy
When shopping for your auto loan, consider options outside of the dealership. Here are some of the best auto lenders for bad credit.
|Capital One||36-72 months||$4,000 and up||Auto purchase|
|Carvana Auto Loan||36-72 months||$1,000-$80,000||Online car buying|
|New Roads||36 - 84 months||$6,000 - $38,000||Preapprovals|
|iLending||36-84 months||$7,500 or more||Refinance loans|
You could also consider your local credit union. Credit unions in particular tend to offer products to help people rehabilitate their finances and may be more flexible in dealing with post-bankruptcy issues. However, a credit union may not do business with you if your bankruptcy discharge includes debts owed to them.
To find a lender who will work with your credit issues, you may have to shop around. If your loan applications get declined, be sure to ask the lender how you can improve your chances of approval next time.
Factors to consider when getting a car loan after bankruptcy
The first car loan after bankruptcy is likely to be subprime, meaning it’s for a borrower with a credit score of 600 or lower. Being in a hurry to get auto financing with bad credit can make you susceptible to getting back into debt you can’t repay. Here’s what you’ll likely face and how to counter them.
High interest might not seem important if your monthly payments are low, but calculating the total cost of your loan repayment could be a real eye-opener. Here’s an example of a simple calculation, without factoring in taxes and fees, based on a 4-year loan repayment:
A $10k loan with a 5% interest rate = $1,054 paid toward interestA $10k loan with an 18% interest rate = $4,100 paid toward interest
It’s important to shop around for a loan so you can find the lowest APR, especially after you’ve been through bankruptcy. The credit bureaus typically allow a window of two weeks for consumers to rate shop, so applying to multiple lenders won’t ding your credit any more than applying to one, as long as you do all applications within that two-week time period.
Paying a loan back over a long time period can have its pros and cons. A long repayment term can lower your monthly payments, which can help you stay within your budget. But a low payment could distract you from the real cost of borrowing: Longer repayment terms mean paying more toward interest. Here’s an example of a calculation based on a $10,000 loan at 10% APR:
3 year repayment = $323 monthly payment and $1,616 in total interest payments5 year repayment = $212 monthly payment and $2,748 in total interest payments
One trick is to get a longer loan term for the low payment, but pay more to the principal each month. If you do this, you’ll pay off your loan faster and pay less in interest, but you can still make only the minimum payment if necessary.
Potential predatory lenders
Financing companies that advertise “no credit check,” “guaranteed financing” and “buy-here, pay-here” are known for their predatory nature. These businesses may do things like lend you more than the car is worth, then charge high interest rates so you’re immediately upside down on your loan.
Consider applying to a national finance company with a good reputation for bad credit car loans and/or apply for an auto loan at your local credit union. If you don’t qualify immediately, talk with a customer service representative and ask what you can do to get approved.
4 tips to increase your approval odds after bankruptcy
After your bankruptcy is discharged, there will be unavoidable damage to your credit. Contrary to the claims of disreputable credit repair companies, no one can immediately remove this information from your credit reports. In other words, there’s no magic reset button.
Start building good credit history
Filing bankruptcy affects each person’s credit differently. The more accounts included in your bankruptcy, the more severe the damage. In addition, the higher your scores before filing, the more points you’ll lose; for example, someone with scores around 750 before bankruptcy can expect to lose 100 or more points.
The most important thing is to show lenders that you’ve overcome your financial difficulties. The best way to do this is by making on-time payments, starting as soon as possible.
Doing this can feel like a Catch-22: You may need new credit to build your credit scores, but you can’t get approved because of bad credit. Here are some of the best ways to get around this obstacle:
- Become an authorized user. If you have a loved one with good credit, ask them to add you to one or more of their credit card accounts as an authorized user. This will cause the account information to appear on both of your credit records as if it belongs to both of you.
- Apply for a secured credit card. These credit cards are designed to help people with poor credit. Instead of qualifying with high credit scores, you qualify by making a deposit.
- Apply for a credit-builder loan. These small loans usually have high interest rates and are paid back relatively quickly; they may not be as beneficial as a secured card or other long-term account, though they can still help you start improving your credit. You’re most likely to find credit-builder loans through a credit union or community bank.
Opt for a low-cost car
It can be difficult for someone with poor credit to qualify for large loan amounts, so another way to improve your chances of approval is by shopping for a cheaper car. This could mean choosing a used vehicle that doesn’t have the newest technology — but it doesn’t mean you have to skimp on reliability or safety. Some of the best-rated new compact cars sell for under $16,000, and you may be able to find a used model for much less.
Keeping your transportation costs down can help you stay on budget and avoid falling back into financial insecurity. Of course, this solution doesn’t have to be permanent — you can consider upsizing once your income and credit allow it.
Find a cosigner
If your credit is in rough condition, lenders may view you as too big a risk and decline your auto loan applications. Having a cosigner is a way to reduce lenders’ risk and increase your chances of approval.
A cosigner is someone who agrees to take full responsibility for loan repayment if you fail to make your payments. A cosigner doesn’t necessarily have to have stellar credit, but finding someone with better credit than yours can improve your chances of qualifying when you apply for an auto loan.
Give it time
Regardless of the steps you take, there’ll be a waiting period before you can qualify for a loan. You may need to present a copy of your bankruptcy discharge order to lenders, and it takes about 60 days to receive the order after your court proceedings. Experts recommend waiting a year after bankruptcy before getting another loan, if possible. While you wait, you can actively work on saving money for your purchase and rebuilding your credit.