Car Loans After Bankruptcy
Getting accepted for a car loan after bankruptcy can be difficult, but it’s not impossible. There are options available, lenders to consider, and ways you can improve your chances.
A car loan is a pretty big deal, giving you a sizable debt that can threaten your credit report and, if you’re not careful, damage your credit score.
How Soon After Bankruptcy Can You Buy a Car?
Debtors have the option of applying for Chapter 7 or Chapter 13 bankruptcy. There are pros and cons for each, with around two Americans filing for Chapter 7 for every one that applies for Chapter 13.
Chapter 7 is also known as liquidation bankruptcy or bankruptcy discharge. Some of your assets will be liquidated to recover funds and repay creditors, with only a few exceptions. This is a quicker option and it generally takes just a few months to complete and remains on your credit report for 10 years.
Chapter 13 creates a repayment plan. There are more exemptions, but the debtor is also required to repay more of their debts. These repayments occur over 3 to 5 years and will remain on your credit report for 7 years.
When looking for a car loan, you should wait for your bankruptcy to finalize. This will make you more creditworthy in the eyes of creditors and will also allow you to start rebuilding your credit.
To avoid confusion, it’s worth noting that bankruptcy is not classed as active just because it remains on your credit report. In other words, you don’t need to wait 7 or 10 years before you start applying for new credit. The longer you wait, the less of an impact these bankruptcies will have on your credit score, but you can start applying much sooner than that.
How to Get a Car Loan After Bankruptcy
It’s time to stop focusing on the kind of car that you want and start focusing on how you’re going to get the money. Create a rough budget so you know what to aim for and then follow the five steps below. If you focus too much on car shopping, you’ll talk yourself into buying quickly and/or paying more than you can afford.
Take Your Time
The stress of bankruptcy can take a lot out of you. Dealing with lawyers, a bankruptcy trustee and the bankruptcy court, and having to make all those sacrifices, can leave you drained and disillusioned.
The worst thing you can do after all that chaos is to rush into buying a car after acquiring a large loan. You need to give yourself time to settle, to start enjoying your life without the burden of debt, and to focus on proper budgeting and financial management. Be frugal, be strict, and don’t rush into new debt, otherwise, you may start that snowball rolling again and end up at rock bottom once more.
Check Your Credit Report
You are entitled to a free credit check once per year from each of the three major credit bureaus. Use this to your advantage and keep a close eye on your report. Get into the habit of checking on a regular basis and understanding every aspect of your score and every piece of your credit history.
It’s important to do this after filing, making sure all information has been reported correctly. If not, it may delay your rebuilding process, but it can be fixed by contacting the credit bureau and filing a dispute.
It may feel like the entire credit sector hates you, but you’re actually in a good position after filing. Whether your debts were discharged or restructured, you should have more money in your account at the end of every month and fewer penalty fees and payments to worry about. This is a great foundation on which you can rebuild your credit and improve your credit score.
Sign up for a secured credit card or credit builder loan; meet your monthly payments religiously; keep an eye on your credit report. If you follow this strategy religiously then your credit score will improve, and a lender will be more inclined to accept your application.
The difference between good credit and bad credit is massive, even for a secured loan. It could mean a difference of thousands of dollars and if you have really bad credit, it’ll be the difference between being accepted and being rejected.
Save, Save, Save
Use your position to put more money aside, building a savings account that will work wonders for your financial health in the short-term and the long-term. Not only will this give you an emergency fund you can use in your time of need, potentially clearing your debt in one fell swoop, but it can also be used as a down payment for a car loan.
The average down payment for a car loan is 12%, but the recommended amount is 20%. In 2019, the average vehicle costs a little over $37,000, which means you’d need a down payment of $7,400. Not only will this increase your odds of being accepted, but it will also give you a more favorable interest rate, not least because you require a smaller loan.
Creditors never leave you alone. Whether you have bad credit or exceptional credit, they will always be waiting on the other end of the phone with a smile and a promise. Don’t assume that the first offer you receive is the best that you can get; shop around, do your research, compare—there will be a better offer just around the corner.
Ways to Finance a Car After Bankruptcy
If you bide your time and build a strong credit history, you can get a car loan from your bank or credit union. These offer the best rates for individuals with respectable credit scores.
With bad credit and a recent bankruptcy, your options are as follows:
Bad Credit Car Loans
Some lenders provide loans specifically for debtors with bad credit. You may still need to wait a couple of years after filing for bankruptcy, but these lenders typically don’t care so much about credit scores and derogatory marks.
However, they offer average APRs of 15% for new cars and 20% for used cars, which are shockingly high for secured loans, especially when you compare them to the 3/4% rates offered to borrowers with good credit scores.
Dealership Financial Programs
Many dealerships offer their own financing programs to help you buy the car of your dreams. These programs are offered mainly for new cars and they come with high-interest rates, fees, and terms. They are more lenient when it comes to credit scores and, in many cases, your loan will be much higher than the value of the car.
Once the interest is paid and the car has depreciated, you could be down 30% on the purchase price.
Should You Buy New or Used?
You can’t beat the smell and feel of a new car. Being able to choose the finishing touches and knowing you’re the first owner is a fantastic feeling. But it’s also a costly one, and if you have recently filed for bankruptcy and are looking for the best deal, it’s an expense that you just can’t afford.
If you’re classed as a “Superprime” borrower, which generally puts you at a credit score of 780 or more, you’ll get an average APR of 3.70%. The average down payment is 12% and the average new car costs $37,000. Based on these statistics and a repayment term of 60 months, you can expect to pay $595 a month, with a total interest payment of $3,155.
If your credit score is just over 600, which would still be a fair score for someone who recently filed for bankruptcy, the average interest rate is 7.5%, which means you’d pay $652 a month and $39.146 over the term.
It’s not great, but you could be forgiven for thinking it was acceptable. After all, what’s a few grand if you’re paying it incrementally every month?
However, if you have bad credit, with a score of less than 500, you could end up paying close to 15% for that brand-new car. This means you’ll pay $775 a month or $46.476 over the term. That’s nearly $10,000 more than the value of the car! To put the monthly payment into perspective, it’s the same you would pay on a $150,000 home loan repaid over 30 years.
That “great deal” the lender offered you on a brand-new car is beginning to look a little less great now, isn’t it?
To make matters worse, that car will lose between 20% and 30% of its value in the first year, with most of that value being lost the moment that you drive the car out of the dealership. This means you’ve just agreed to repay over $46,000 on a car that will be worth less than $30,000 in 12 months and less than $15,000 by the end of the term.
If you’re only being offered subprime rates for your subprime credit score, you should consider a used car instead. This may increase your interest rate slightly, but you won’t lose as much value in the first year and you can pay much less for a car of a similar standard.
$10,000 doesn’t get you very far for a brand-new car and will simply provide you with a large down payment. But for a used car, that money can pretty much buy the vehicle outright.
Summary: Assess Your Options
It’s difficult to get any kind of loan after pretty much any chapter bankruptcy. The only exceptions are small secured debts, such as a secured credit card. However, with a little patience and some careful consideration, you can get the loan you want at a rate that is acceptable.
And remember, the longer you wait after filing for bankruptcy, the better those rates will be and the more likely they are to accept you. Weigh-up your options, ask yourself if you really need that car right now or if you can wait a few years, and then make your decision. There’s a good chance that a lack of foresight and consideration is the reason you filed for bankruptcy in the first place, don’t repeat those mistakes.