If you’re a car person who has just declared bankruptcy, or even if you’re just a fan of reliable transportation, the fear may have struck you that you’ll never again be approved for anything better than a beat-up jalopy and you’re condemned to driving nothing but a used car on its last legs.
The truth is that even with a bankruptcy on your record, you can qualify for a reasonably-termed auto loan that will get you behind the wheel of your dream car (or close to it). It may take a bit more time to qualify for a Ferrari than a Ford, but when you know how to recover from bankruptcy, nothing — including a bankruptcy — can keep you off the road.
Before Looking for an Auto Loan After Bankruptcy
While you can still get good financing for a car before your bankruptcy has been wiped from your record, it’s important to show to lenders that your financial situation has improved since the day it was discharged.
You do this by rebuilding your credit. Taking out a secured credit card after bankruptcy, secured loans, and finding a co-signer on a rental lease/mortgage can all help your credit score rebound fast.
Tip: See this article on the best credit cards after bankruptcy.
Also, consider hiring a credit repair company to help get your credit score in good standing. Many of these companies are legitimate and can be a great resource for busy people without the time to dispute items on their credit reports with the credit bureaus. Basically, these companies go to bat for you and can also serve as financial advisors. This can be enormously helpful especially in the beginning stages of your credit rebuild.
How Buying a Car After Bankruptcy Helps Your Credit
When you think about it, getting an auto loan is not much different than any other kind of loan: you’re borrowing money you intend on paying back.
And as long as you make your payments on time, buying a car in itself can be another great way to rebuild your credit.
If you approach it this way – that purchasing a car isn’t just another purchase, but also a tool to repair your credit – it actually makes sense to buy a car after your bankruptcy is discharged… if you’re in the right position. It’s important that this expense can fit into your budget after bankruptcy.
It’s important to keep in mind how fragile your credit is during this time, however, and that any hit to it now could be catastrophic. Be realistic. If purchasing a new car will overextend your finances and what lines of credit you have, it makes little sense to take on another monthly payment, even if it means driving your junker without air conditioning for a month or two more. Waiting enough time to save money and let your credit score rise may be what’s best for your current situation.
When Leasing a Car Makes Sense
As someone with a low credit score, you’ll probably find it difficult to find an auto dealership willing to give you a good option on a car lease. One of the main reasons people like to lease a car instead of purchasing one of their own is that the dealership is on the line for all repairs and maintenance. Dealerships like leasing cars because it keeps them off the lot and earning them a monthly income.
Usually, the only restriction on a lease agreement is the amount of miles driven before extra fees are incurred, and for people who use their cars purely for transportation it can make a lot of sense. Another great thing about leasing a car is that after the lease term is up (usually two or three years) you get to trade it in for a new model.
Plenty of people enjoy the relative no-hassle arrangement of leasing a car. But remember that as someone with a bankruptcy on your credit report, the number of dealerships willing to work with you might be small. When you do find a place that will lease to you, be prepared to pay higher-than-average rates.
That’s not to say it’s impossible to lease a car with a recent bankruptcy. If you’ve leased cars before, speak with your dealership to see what can be worked out. Depending on your history with a company or firm, they may be able to work the numbers in your favor.
Why Shopping Around for an Auto Loan After Bankruptcy Is Important
Finding the right financing for your car is going to be almost as important as finding the right car. The first mistake many people make (especially if they’ve never bought a car before) is to treat an auto loan like any other kind of loan. They’re not. Aside from all the little differences in the details, the major difference with an auto loan is that collateral is involved: namely, your new car.
When you take out a regular unsecured loan (something you may have already found difficult to do with a bankruptcy) you’re asking the lender to take a risk on you. In order to make a smart choice, lenders look at your credit reports and history… and having a bankruptcy is a major red flag, perhaps the biggest. And auto loans can be quite large.
But lenders who specialize in auto loans know that should you default on your payments, they can always recoup some of their losses by repossessing the car. Having a repossessed vehicle on your credit at this point is absolutely toxic, so it’s crucial that you be realistic in what vehicle you’re thinking of. Be sure to make those payments.
Where to Find an Auto Loan After Bankruptcy
The first step when shopping for an auto loan is to go to your bank or credit union and get pre-approved. You may think mainstream banks would never finance someone with bad credit and a bankruptcy, but you would be surprised. Your bank may present an arrangement with interest rates you find reasonable and doing business with a bank you already have a relationship with will usually make things go smoother.
But if your bank is only willing to lend you money at rates you find unacceptable, not to worry. There are plenty of auto lenders out there. Companies like Auto Credit Express and myAutoloan.com offer specialized auto loans for people in situations just like yours (and worse).
Beware of predatory lenders, however, and never take the first “great” deal that comes along. Research the company online. If they don’t have an online presence in this day and age, it’s a red flag. Some warning signs of predatory lenders include:
- you’re told that you have to make a decision to sign the paperwork on the spot
- guaranteed loans without a credit check
- requests for wire transfers
- upfront fees aside from the down payment
Remember that interest rates vary widely, and the shop across the street could offer terms miles ahead of what the first shop offers. Shop, shop, shop.
Getting Approval for an Auto Loan After Bankruptcy
When applying for an auto loan, consider including a letter of explanation explaining your bankruptcy in your application packet, even if the lender does not mention one. This letter is not meant to be a detailed history of how your finances went off the rails and all the trials and tribulations you’ve faced since; it’s just a short explanation (no more than a page, if that) that outlines why there is a bankruptcy on your credit reports and what steps you’ve taken to repair your credit.
Mention if there was a medical emergency or natural disaster played a role. And even though much of this information will be available to them from your credit report, list what secured debts you’ve taken on to improve your credit score, including secured credit cards. You would be surprised what a difference a small human touch like this can make in matters such as approving loan applications.
Picking Up the Keys
When you buy a car, timing is a big factor. This is especially true with a bankruptcy on your credit report. But if you pay off your car loan responsibly (meaning never, ever missing a payment), it will be another indicator to lenders that you are once again becoming a safe investment. After all, someone who can successfully purchase a car is probably someone a credit card company wants to know. It’s also a great step further toward bigger goals, like buying a house after bankruptcy.
And at the end of the day, having regular access to a car simply is no longer a luxury for most of us. It’s a necessity. Banks and auto lenders know you don’t just want a car for frivolous reasons. People need cars for work and life, and lenders know this. If you’re having trouble improving your credit score or want to make sure your auto payments are being reported properly to improve your credit score then you may consider working with a credit repair company.