Buying a Car After Bankruptcy

Car sitting on loan papers next to money and credit cards

In the realm of life-altering, ego-shattering events, bankruptcy is among the worst. But as ruinous as a Chapter 7 filing can be to your finances, it needn’t put the brakes your plans to buy a car.

Although there are splotches your credit report, you can get a car loan after bankruptcy. You just need to work harder before you can get behind the wheel.

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 when negotiating with a sales rep. So, give yourself a pep talk. Think about the positives, like your job and your willingness to get a fresh start on your life.

Why is this important? If you need to get a car loan after bankruptcy, you should know that there are lenders who will slap onerous terms on the money you borrow, often demanding extremely high interest rates even if you make a decent down payment on the car you buy.

Because it is more difficult to get car loans during and after bankruptcy, many people forlornly accept bad deals. Don’t do it.

Avoid Predatory Dealers

You should also steer clear of car dealers who offer subprime loans and buy-here, pay-here financing agreements. They often charge extremely high interest rates, demanding payments that can ruin your finances. What’s more, you likely will end up buying a junker, since these dealers have experience exploiting desperation and will sell you the worst car on their lot. Car dealers in this category are predatory lenders dressed up as car dealers and you should avoid them.

Get Pre-approved before Car Shopping

The smartest move would be to go to your bank or credit union and seek pre-approval for a car loan. They may surprise you and present conditions and interest rates that make the car-buying experience much easier, or they may show you loan terms that you know you can’t possibly afford.

That would be a sign that you need to find some other form of transportation while you rebuild your credit.

The Effect of Bankruptcy on Your Credit Report

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 3-5 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 before you shop for a car. The poorer your financial record, the lower your credit 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 requires 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.

How Soon After Bankruptcy Can I Get a Car Loan?

There isn’t a fixed period after you settle a bankruptcy before you can buy a car. In fact, if you can find reasonable financing, buying a car and making payments on time can help restore your credit rating. But you should proceed with caution. Arranging financing in advance, not paying too much for a car and avoiding predatory lenders are important steps to avoid repeat financial problems.

Check Out Bank and Credit Union Financing

Before shopping for a car, become familiar with the lending options. Visit banks or credit unions, starting with those with which you have a relationship, 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.

If you have a poor credit history and are unlikely to qualify for a conventional car loan, consider a subprime lender, but be careful how you proceed. Subprime loans can have very unfavorable terms, and you could easily set yourself up for repossession. If you do consider a subprime loan, avoid getting one from a buy-here, pay-here car dealer.

If possible, get the bank or credit union to pre-approve your loan. Before you meet with a loan officer, assemble your pay stubs and credit report, as well as disability- and life-insurance documents. When you talk to the loan officer, make sure you ask lots of questions. For instance, you need to know if the loan you might be offered has prepayment or early payment penalties which could make refinancing prohibitively costly. If your credit rating improves while you’re paying off your car, you might be able to refinance at a lower interest rate if you don’t face restrictions.

Buy a Used Car

Next, get real about what you need. Buying a Jaguar or a Porsche, especially a new one, isn’t wise. In fact, any new car is probably not for you when you’re trying to rebuild your credit. You will almost certainly pay more interest on a loan than someone with a solid credit score. New cars lose 20% of their value as soon as you leave the dealership, and their value continues to fall quickly during the first two years of ownership.

Payments on new cars are higher than on used cars. More debt and higher payments could subvert your effort to rebuild your credit, since they mean less money saved.

Look for a basic used car in good shape. 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.

If you haven’t been pre-approved for a loan, it might be wise to limit the number of car dealerships you visit. Also, limit your shopping to a single day if possible. Why? Your credit score goes down whenever a business makes an inquiry about it. The fewer inquiries, and the fewer days on which inquiries are made, can limit the damage.

Make A Down Payment on The Vehicle

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 must borrow at high rates. Lenders look favorably at the equity you have in the car – the more money you invest, the better you are as a credit risk. The more cash you can pay, the better. All cash, obviously, is best.

Our auto loan calculator can help you determine how much money to put down on a vehicle so that you end up with a monthly payment that you can afford.

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 quote for how much 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 on loans. 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.


Sources:

NA, ND. Buying a Car after Bankruptcy. Retrieved from: https://www.joyofbankruptcy.com/car.php

Detweiler, G. (2015, March 30) How to Get a Car Loan after Bankruptcy. Retrieved from: https://www.cbsnews.com/news/how-to-get-a-car-loan-after-bankruptcy/

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