Can I Get a Car Loan After Bankruptcy?
Getting a car loan after bankruptcy is possible, but it usually takes some research and effort to secure reasonable rates and terms. There are ways to improve your chances of loan approval, such as boosting your credit score, saving for a down payment and adding a creditworthy cosigner.
Here’s what you need to know about bankruptcy car loans and how to get back on the road as soon as possible.
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.
| Chapter 7 | Chapter 13 | |
|---|---|---|
| Benefits | Allows you to discharge qualifying debts and restart with a fresh slate. | Allows you to set up a payment plan to catch up on missed and non-dischargeable debts. |
| What happens to existing vehicles? | A bankruptcy trustee will sell your assets to repay your debt, often including any vehicles. However, you might be able to keep your car if you qualify for an exemption or its equity doesn’t exceed a specified amount. | 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. |
| How to purchase a car after bankruptcy | It’s best to purchase a new vehicle after your bankruptcy has been finalized, which can take four to six months to complete. Buying a car or acquiring other assets beforehand can be a sign of fraud. | You may be able to purchase a vehicle during bankruptcy if you receive permission from the court. When the process is complete, you can finance a vehicle without court permission. |
How to get a car loan after bankruptcy
If you have a bankruptcy on your credit report and need a car loan, here’s how to increase your likelihood of success.
Check your credit
While bankruptcy proceedings likely impacted your credit score, you’ll want to check for errors on your credit report to avoid your score dipping even further. You can access a free copy of your credit report every year from each credit bureau — Experian, TransUnion and Equifax.
AnnualCreditReport.com is the only federally approved website that provides access to all three reports. You can also track your score and receive free credit alerts with LendingTree Spring.
Save a down payment
Auto loan calculators can help identify what you can afford while estimating your potential car payments. Experts generally recommend a minimum 10% down payment for a car to help you get the best rates and more favorable terms. Creating a budget can help track your saving goals.
Compare lenders and preapproval offers
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 to get preapproved for auto financing. This way, you can compare several offers to find the best deal for your situation.
Review and sign paperwork
Your lender or the dealership finance manager will walk you through the car loan documentation checklist, including any potential dealer fees. Read the fine print and ensure you understand the loan terms before proceeding.
Where to find auto loans after bankruptcy
When shopping for an auto loan, consider options outside of the dealership. Here are some popular auto lenders for bad credit.
You could also see if your local credit union offers car loans. Credit unions tend to be more flexible in dealing with post-bankruptcy issues. However, a credit union may decline your business if you have current bankruptcy discharge debts owed to them.
Be prepared to shop around to find a bank that works with bankruptcies for auto loans. If your loan applications get declined, ask the lender how to improve your approval chances next time.
4 ways to increase your approval odds after bankruptcy
Contrary to the claims of disreputable credit repair companies, there’s no magic reset button to immediately remove the damage to your credit score caused by bankruptcy. However, here are four steps to improve your chances of getting an auto loan after bankruptcy.
1. Build good credit history
While bankruptcy can affect your credit, the impact differs based on multiple factors. 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.
Most importantly, you want to show lenders how you’ve overcome your financial difficulties by making on-time payments with other debts.
However, you might struggle to get approved for any kind of debt because of the bankruptcy marks on your credit report. If so, here are some steps to take:
- Become an authorized user. If you have a close friend or family member with good credit, ask them to add you to one or more credit card accounts as an authorized user. Doing so will allow the account information to appear on both of your credit records, helping you build a solid credit history.
- Apply for a secured credit card. Low-credit borrowers who can provide a cash deposit might be able to qualify for a secured credit card.
- Apply for a credit-builder loan. Typically offered through credit unions or community banks, credit-builder loans can help you start improving your credit. However, they usually come with higher interest rates and shorter repayment terms.
2. Opt for a low-cost car
Look for practical vehicles that fit your lifestyle, budget and credit score. You might have the most luck buying a used versus new car, but watch out for maintenance and repair costs, which can jack up the overall cost of owning a car.
3. Find a car loan cosigner
A lender may decline your auto loan application if your credit is in rough condition. Having a creditworthy cosigner can help reduce the lender’s risk and increase your chances of approval.
A cosigner agrees to take full responsibility for loan repayment if you fail to make your payments. While a cosigner doesn’t need stellar credit, finding someone with good to excellent credit can improve your chances of qualifying for the most competitive rates.
4. Give it time
Regardless of your steps, expect a waiting period before you can qualify for a car loan with bankruptcy. 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 after bankruptcy.
What to consider when getting a car loan after bankruptcy
The first car loan after bankruptcy is likely to be subprime, meaning it’s for borrowers with credit scores between 580 and 619. Rushing to get auto financing with bad credit puts you at risk of taking on more debt than you can afford.
Here are some obstacles you’ll likely face with bankruptcy car financing and how to deal with them.
High APRs
High interest might seem insignificant if your monthly payments are low, but calculating the total cost of your loan repayment could be a real eye-opener.
ExampleTake a look at the differences between total interest payments on a $15,000 car loan with a 4-year repayment term:
Based on these calculations, you could save $4,569 by going with a lower interest rate. |
It’s important to shop around for a loan to find the lowest APR, especially after you’ve been through bankruptcy. The credit bureaus typically allow 45 days for consumers to rate shop for a car loan, so applying to multiple lenders won’t ding your credit any more than applying to one, as long as you submit all applications within that period.
Long terms
While a long repayment term can lower your monthly payments and help you stay within your budget, it typically results in more paid interest.
Example
Take a look at how the total interest payments change based on the term length of a $15,000 car loan with a 10% rate:
- 36-month repayment term = $2,424 total paid interest
- 60-month repayment term = $4,122 total paid interest
Based on these calculations, you could save $1,698 by going with a shorter repayment term.
If you want a low monthly payment with a longer loan term, consider paying more toward the principal each month. With this method, you can pay your loan faster and save on interest while still having the option to pay the minimum amount when needed.
Potential predatory lenders
Watch out for financing companies that advertise “no-credit-check auto loans,” “guaranteed financing” and “buy-here, pay-here.” These businesses may lend you more than the car is worth, charging 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, or apply for an auto loan at your local credit union. If you don’t qualify, talk with a customer service representative and ask what you can do to get approved. Reading auto lender reviews in advance can help you avoid predatory lenders.
How to keep your car when filing bankruptcy
The steps you need to take to keep a vehicle during bankruptcy depend on the chapter you file.
- Chapter 7 bankruptcy: The only way to keep your car during a Chapter 7 bankruptcy is to protect your vehicle equity with a bankruptcy exemption, which varies by state. You must be current on your auto loan when you file for bankruptcy, otherwise the lender can repossess the vehicle.
- Chapter 13 bankruptcy: You should be able to keep your vehicle in a Chapter 13 bankruptcy if you’re behind on car payments and you agree to the proposed payment plan to catch up — typically three to five years. However, failing to stick to the payment plan could result in car repossession.