Introduction
Bankruptcy is a difficult process and it is a very emotional experience for people having to file for bankruptcy. It is mostly sought by people who are in deep levels of debt and wish to start afresh. However, this is not the end of the world for you financially especially if you are planning to buy a car. At Automatic Car Credit, we fully appreciate the struggles of people who have been through bankruptcy and need a car.
This guide will therefore focus on how you can still get approved for a car loan even if you have a bankruptcy. In this article, you will learn about the various types of bankruptcy, lenders’ perception of borrowers in this state, and how you can secure an auto loan with bankruptcy.
What Bankruptcy Is?: Chapter 7 vs Chapter 13
Before diving into the specifics of getting a car loan post-bankruptcy, it’s essential to understand the two most common types of personal bankruptcy filings: Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy
Chapter 7 is often referred to as “liquidation bankruptcy.” In this kind of bankruptcy, a trustee takes all your non-exempt property and sells it to the creditors. Most of your debts are then discharged, which means that you leave with a clean record as far as debts are concerned. However, Chapter 7 bankruptcy remains on your credit report for up to 10 years and this will hamper your ability to get credit in future.
Chapter 13 Bankruptcy
Chapter 13, also known as “wage earner’s bankruptcy,” involves reorganizing your debts and creating a repayment plan that spans three to five years. At this time, you are required to make payments to a trustee who in turn pays your creditors. Chapter 13 bankruptcy filing also remains on your credit report for seven years.
Both types of bankruptcy have a bad effect on your credit, but you can get a car loan, if you try to improve your credit.
Can You Get a Car Loan After Bankruptcy?
Yes, you can get a car loan after bankruptcy, but it may require some patience, planning, and effort. Lenders who work with individuals post-bankruptcy understand the financial setbacks associated with it and may offer special programs designed for people in this situation. However, the terms of the loan may be less favorable due to the increased risk associated with lending to someone with a recent bankruptcy.
Getting a Car Loan After Chapter 7 Bankruptcy
Once your Chapter 7 bankruptcy is discharged, which typically takes around 4 to 6 months, you may begin the process of applying for a car loan. However, there are a few important things to keep in mind:
Credit Score:
After bankruptcy, your credit score will take a significant hit. Most lenders will look at your score when deciding to approve your loan. Rebuilding your credit should be a priority before applying for a loan to increase your chances of approval.
Down Payment:
The more money you can put down, the better your chances of approval. A larger down payment reduces the loan-to-value (LTV) ratio, which makes the loan less risky for lenders.
Interest Rates:
Expect to pay higher interest rates if you have a bankruptcy on your record. This is because lenders see you as a higher-risk borrower. While it’s still possible to secure a loan, you may want to consider refinancing later when your credit improves.
Getting a Car Loan After Chapter 13 Bankruptcy
Unlike Chapter 7 bankruptcy, where debts are wiped out, Chapter 13 bankruptcy involves a repayment plan. You may need to get approval from the bankruptcy court or trustee before you can take on new debt, including an auto loan. However, it is possible to qualify for a car loan during or after the repayment period. Here’s how:
Trustee Approval:
If you’re in the middle of your Chapter 13 repayment plan, you’ll need to get permission from the court or trustee to take on new debt. The court will evaluate your financial situation to ensure that adding a car loan won’t interfere with your repayment obligations.
Proof of Income:
Lenders will want to see that you have a reliable income that can cover your auto loan payments in addition to your Chapter 13 repayment plan. Providing evidence of steady employment and income is crucial for getting approved.
Specialized Lenders:
Some lenders specialize in working with borrowers who are in or have recently completed Chapter 13 bankruptcy. These lenders understand the unique circumstances and are more willing to work with you.
Tips for Getting a Car Loan After Bankruptcy
While getting a car loan after bankruptcy is possible, it may not be easy. Here are some tips to increase your chances of approval and secure better loan terms:
- Rebuild Your Credit
Rebuilding your credit is the most crucial step after bankruptcy. Start by paying all of your bills on time, as payment history is one of the biggest factors in your credit score. You can also consider getting a secured credit card or a credit-builder loan to help improve your credit score over time.
- Save for a Larger Down Payment
A substantial down payment shows lenders that you are committed to the loan and reduces their risk. Aim for a down payment of at least 20% of the car’s value, if possible.
- Shop Around for Lenders
Not all lenders are willing to work with borrowers who have filed for bankruptcy, but some specialize in this area. Take the time to research and compare lenders to find one that offers reasonable terms despite your credit history.
- Get Pre-Approved
Applying for pre-approval for an auto loan before you begin your car search will save your time and set the right budget. Pre-approval also helps you in bargaining especially when you are at the dealership.
- Consider a Co-Signer
In case your credit score remains low after bankruptcy, the presence of a co-signer with good credit is beneficial when obtaining a loan. However, you need to know that if you fail to make the payments on the loan, then it will be the co-signer’s responsibility to make them.
- Be realistic when identifying the car
You may not get a loan on a prestige car immediately if you file for bankruptcy, but there are reliable and cheap cars out there in the market. Avoid a car that you cannot afford after coming out of bankruptcy and one that you have to take a loan to finance.
How to Get Better Loan Terms Over Time
Of course, the terms of your first car loan after bankruptcy are not going to be perfect, but they do not have to be like this all the time. After several months of using the credit card and paying your bills on time you can approach the company and request for a better interest rate and better repayment terms.
Refinancing is a good idea once you are able to demonstrate that you are capable of managing your debts well. You can cut down your monthly payments and the overall rate of interest that you are charged for the loan if you manage to get a lower interest rate.
Bottom Line
Though it is a major blow to have a bad credit score, it does not mean that you cannot secure a car loan. It is therefore important to know that even with some bad credit rating, one can still finance a vehicle and work towards the rebuilding of his/her financial status. At Automatic Car Credit, you can rest assured that we are going to be by your side every step of the way and that applies even if you have been through bankruptcy recently. Please do not hesitate to call us today in order to discuss the possibilities and begin your path to safe transportation and compensation.