Although entering bankruptcy splotches your credit report, it doesn’t block you from buying wheels. You just need to work harder to reach the goal.
Before you visit a dealership or a car-buying website, do some repair work on yourself. Bankruptcy often diminishes one’s sense of self-worth, and that’s a bad mindset to have when negotiating with a sales rep. So give yourself a pep talk. Think about the positives, like your job and your willingness to start life anew.
Why is this important? If you need to get a car loan, be aware that there are lenders who will want to slap onerous terms on the money you borrow, often demanding extremely high interest rates even if you make a down payment on the car you buy. Because it is more difficult to get loans during and after bankruptcy, many people forlornly accept bad deals. Don’t do it.
Most people who enter personal bankruptcy file Chapter 7, a relatively fast process that can resolve a claim in a matter of months and erase debts by liquidating assets. A smaller number go the Chapter 13 route, a much slower process that involves debt repayment and asset protection that can take years. Chapter 7 bankruptcy stays on your credit report for 10 years. Chapter 13 is there for seven years.
During that time, credit can be hard to get and interest rates on borrowed money probably will be high. Lenders typically use FICO scores to set interest rates, so obtain yours. The poorer your financial record, the lower your score and higher your interest rates will be. The only way to combat the bad information in your credit report is to slowly replace it with good information.
You can start reporting positive information to the credit bureaus by getting a secured or unsecured credit card. With a low credit score, you’ll almost certainly have a high interest rates, especially on an unsecured card, which doesn’t require collateral. Use the card to build your credit after bankruptcy, but don’t carry a balance on the debt from month to month. A secured card might come with more reasonable terms, but require a deposit equal to the borrowing limit on the card. You will probably want to use your card for at least six months, making timely payments. Doing this could substantially reduce your interest payment when you apply for a car loan.
Before shopping for a car, become familiar with the lending options. Visit a bank or a credit union to review your financing options before heading to a dealership. Lenders will want to know how you handle money. If you always made timely loan payments until a major medical bill wiped out your savings, make sure the lender knows that. If your bankruptcy followed a job loss and unemployment, explain that too.
Next, get real about what you need. Buying a Jaguar or a Porsche, especially a new one, wouldn’t be wise. But a basic used car in good shape might be a good choice. Figure out how much your monthly auto payment will be. Consider gas, highway tolls, parking costs, insurance, registration fees and expected maintenance. Add those costs to the monthly car loan payment.
Though bankruptcy might have depleted your assets, if you have access to money for a down payment, consider using it. There are two advantages: The larger the down payment, the less you have to borrow at high rates. Lenders will also look favorably at the equity you have in the car – the more money you invest, the better your credit risk. The more cash you can pay, the better. All cash, obviously, is best.
With a partially repaired credit history, it’s time to shop. Call as many car dealers in your area as you can, explaining your situation. Tell them about your new credit card. If you still own a home and are making mortgage payments, let them know. Get a sense for what they might loan you and the interest rate.
It’s a good idea to avoid car dealers that cater to customers with damaged credit. These dealers, known as buy-here, pay-here businesses, will often sell poorly maintained cars and charge extremely high interest rates. They often won’t even discuss vehicles until examining your credit report, then will offer only a few cars that require big down payments and come with very high interest rates.
Before visiting a buy here, pay here dealer, check with the Better Business Bureau or do an online search for consumer complaints to learn if the business has caused problems for others.
Last, consider all the information you gathered before closing the deal. If a credit union has a better deal on loans, don’t settle for what a dealer offers. If you can borrow money from a family member to increase your down payment, consider doing that. Buying a car can provide needed transportation and paying for it will help re-establish your credit.
Ladika, Susan. (2013, August 20). How to Buy a Car After Bankruptcy Retrieved from: http://www.edmunds.com/car-loan/how-to-buy-a-car-after-bankruptcy.html
Harelik, Justin. (ND) Getting Your First Post-Bankruptcy Car Loan. Retrieved from: http://www.bankrate.com/finance/debt/getting-your-first-post-bankruptcy-car-loan.aspx
Detweiler, Gerri. (2015, March 30). How to Get a Car Loan After Bankruptcy. Retrieved from: http://finance.yahoo.com/news/car-loan-bankruptcy-090051792.html
NA, ND. Chapter 7 & 13: How long will negative information remain on my credit report? Retrieved from http://www.myfico.com/crediteducation/questions/negative-items-on-credit-report-chapter-7-13.aspx