Buying a car after filing for a bankruptcy can feel somewhat daunting, but it need not be so. Just don’t expect to receive a government bailout like GM never should have received but this is another topic.
Bankruptcy is sometimes the best way forward when dealing with exceptionally unfavorable financial circumstances such as a job loss or unexpected medical bills.
It is important to know that you will have multiple car loan options even after filing for a bankruptcy. You do not even have to wait for the entire bankruptcy period to end. Here is how you can get your first car loan after bankruptcy.
Check Your Credit Scores
This might be the last thing you want to do after filing for bankruptcy. However, if you want a car loan, then you need to know what you are up against.
Checking your credit scores and getting your credit history reports will give you a clearer picture of your financial situation. You do need to accept the first loan offer you get. Even with bankruptcy you can shop around for the best rates.
However, you need to set realistic expectations. You will have to pay more than the average person for acquiring the same car loan. There are a number of websites where you can check your free annual credit reports.
The first thing a lender will do is pull your customized credit score. Heavy weightage is paid to previous auto loans. Hence, make sure to glance through that section.
Any positive on-time car payment reported during or after a bankruptcy will work in your favor. Reaffirming a car loan balance ensures that it stays on your credit report. If you did not reaffirm, but paid the loan balance, then make sure you visit a lender with proof of post-bankruptcy payments.
Try For a Large Down Payment
Sometimes, bankruptcy can wipe away the slate and improve your financial situation. Not paying all those loans should have freed up some spare cash each month. Make sure you start saving for a down payment from the first moment you begin thinking of getting a new car.
It is best to build up your savings and live a minimum of a year on cash-only basis before you seek out credit after filing for bankruptcy.
This ensures that you have some ready cash available for making a down payment. Lenders like to mitigate their risk. The larger the down payment, lower is the risk because the lender has your vehicle as collateral.
But if your car looks like the one did in Planes, Trains, and Automobiles looked like after it caught on fire then you don’t have to worry about receiving any collateral. Don’t even try to work out a deal for any car that looks like that!
Get a Pre-approved Loan
Shop around for the best rates among the many financial institutions, credit unions, banks, and dealerships.
Prepare a file including recent pay stubs, latest credit report and proof of any post-bankruptcy debt payments you made. However, you need to be careful to limit all your queries in a short space of time.
Lenders conduct hard credit checks when you apply for a car loan. This can negatively impact your credit score by temporarily shaving off a few points. However, credit reporting agencies consider multiple inquiries within a short period as one inquiry.
You should shop around for available rates before you visit a dealership. Be prepared to wind up with a high interest rate if your bankruptcy is recent and you haven’t been able to rebuild your credit score.
Say No to ‘Buy Here, Pay Here’ Dealer Loans
These loans are some of the worst car loans you can pick up. The dealer adds his own administrative charges to the interest rate and milks money off your monthly payments. You can end up paying thousands to the dealer. This amount can be better invested towards your car payments.
There are a number of options such as credit unions or bad credit auto lenders who can help you with your first car loan after filing for bankruptcy. Your local credit union might finance you for a car loan and be more willing to work with you.
You can consider another popular option called swap leasing. In this, you take over the remaining payments of someone else’s lease and get to keep the car. They get out of a car lease that is not working for them. However, get the vehicle checked by a trusted mechanic and read all terms of the agreement carefully.
Do Not Forget to Refinance
Once you obtain a car loan, make sure you always pay on time and in full. These payments can contribute towards improving your overall credit score within a period of 6 to 12 months. You should refinance your loan for better terms when your credit score improves.
However, refinancing is subjective and depends on the market situation as well as your lender. Do not pick up a beyond-budget expensive loan thinking you will have it refinanced later.
Tips for the Best Loan Terms
The last thing you want to be is unable to pay for your car loan after filing for bankruptcy. Not planning ahead and acquiring an out of budget loan is a recipe for disaster. You can get better terms with these tips.
If you have spare cash then make sure you use it for making a bigger down payment. Lenders look favorably upon the terms when their risk is reduced. You can enjoy lower monthly payments with better terms by spending a few extra hundred dollars.
Cosigners with excellent credit scores can make a big difference on the loan. Their guarantee will offset the risk you pose with your low credit score. You can qualify for better rates.
Watch out for elusive extras in the terms of agreements especially with dealer loans. Lenders try to bump their profits with a lot of unnecessary add-ons especially when you are desperate.
Avoid anything that is variable, adjustable, or conditional. Fixed rate loans might look more expensive right now. However, they are easier to plan and pay for.
It is not sagacious to gamble on your loan rates after filing for bankruptcy. A variable can easily change against your favor down the road making a loan more expensive than you bargained for.
The Bottom Line
Loans should ideally be taken when you know you can repay them. Downgrading your car may be a suitable alternative to getting a car loan. We recommend that you take steps to build your credit score before jumping into the car loan market after a bankruptcy.