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Getting approved for a car loan after bankruptcy is difficult, but it’s not impossible. With a little extra work, you may be able to finance a new (or at least new-to-you) set of wheels sooner than you think.
If you’ve filed for bankruptcy or are considering this option, you may find yourself having trouble getting approved for credit, including a car loan.
Let’s take a look at how filing for a Chapter 7 or Chapter 13 bankruptcy could affect your ability to get a car loan, and steps you can take to help increase your chances of loan approval.
Getting a car loan after Chapter 7 vs. Chapter 13 bankruptcy
There are two kinds of bankruptcy that individuals can file: Chapter 7 and Chapter 13. The type of bankruptcy you file for and the amount of time since you filed could affect your ability to get a car loan.
With a Chapter 7 bankruptcy, some of your possessions and property can be liquidated in order to repay outstanding debts, and certain debts may be discharged. This type of bankruptcy can take about 80 to 130 days to complete, from the initial filing to the discharge of debt, and can stay on your credit reports for up to 10 years from filing.
A Chapter 13 bankruptcy, on the other hand, involves repaying debts and is also known as a wage earner’s plan. With Chapter 13, you create a plan to repay all or part of your debt within three to five years. This plan, which must be court approved, usually involves you paying a fixed amount to a trustee on a regular basis, typically biweekly or monthly. You can expect a Chapter 13 bankruptcy to remain on your credit reports for up to seven years from filing.
While a bankruptcy can be bad news for your credit scores, getting approved for a car loan is still possible. But before you start applying, you’ll want to wait until after your bankruptcy is finalized.What's the difference between Chapter 7 and Chapter 13 bankruptcy?
Considerations with a car loan after bankruptcy
Your credit reports are a history of how well you’ve managed your finances. Unsurprisingly, bankruptcy will lower your credit scores.
The effect on your scores depends on your credit before bankruptcy. If you had high credit scores and a good credit history, you’ll likely see a significant drop in your scores. But if your credit wasn’t strong to begin with, the impact to your scores may not be as big. Another factor is the number of accounts included in your bankruptcy — the more accounts included, the bigger the hit to your credit scores.
These changes to your credit can pose some problems as you try to qualify for an auto loan.
Difficulty getting approved
Some lenders may be hesitant to give you an auto loan, but there are financial institutions that specialize in working with people who have subprime credit or a bankruptcy in their past.
If you’re having trouble getting approved for a car loan, you might be tempted to get one through a “guaranteed” or “no credit check” auto lender — these lines of credit are commonly known as “buy-here, pay-here” loans. But beware: If a type of loan sounds too good to be true, it probably is.
These buy-here, pay-here loans are typically offered by dealerships with in-house financing and may not require a credit check. This may seem like a great solution if you’re struggling to get approved elsewhere. But these loans usually come with higher interest rates than those offered by other lenders, and you might end up with a loan for more than the vehicle is worth.
High interest rates
If you’re approved for financing, expect higher interest rates on your car loan than if you hadn’t filed bankruptcy. How high? Auto loan interest rates for those with credit scores of 600 or less ranged from 12% to almost 21% higher in the fourth quarter of 2018, according to Experian’s State of the Automotive Finance Market report.
How to get a car loan after bankruptcy
Before you set foot inside a dealership or apply for financing, here are four things you can do to help improve your chances of getting approved a car loan.
1. Check your credit
Checking your credit reports is a great way to review your financial health. You can request your free credit report from each of the major consumer credit bureaus — Experian, TransUnion and Equifax — once a year on AnnualCreditReport.com. You can also check your VantageScore 3.0 scores from Equifax and TransUnion on Credit Karma for free. But keep in mind that these scores may not be the same scores a lender uses when checking your credit.
The Consumer Financial Protection Bureau recommends checking your credit reports at least once a year, and before a major purchase like a car. Make sure the information on your reports is accurate, and dispute anything that isn’t.
While there’s no universal minimum credit score required to get an auto loan, you’ll likely have difficulty getting approved by some lenders if your credit scores are low. Experian’s State of the Automotive Finance Market report showed that less than 20% of auto loans issued in the fourth quarter of 2018 went to borrowers with credit scores of 600 or less.
2. Rebuild your credit
Once you’ve reviewed your credit reports and scores — and if you’re able to wait to buy a car — consider taking time to repair your credit if you need to. This could help you get approved for a car loan at a lower interest rate. A secured credit card, credit-builder loan or becoming an authorized user on a friend or family member’s credit card could all help you begin to rebuild your credit.Credit Karma Guide to Building Credit
3. Save for a down payment
A down payment can increase your chances of getting approved and could reduce your interest rate. There’s no set amount that you should put down for a new car. The general rule of thumb is that you should put 20% down on a new car, though Edmunds found in 2017 that the average down payment is 12%.
4. Shop around
When you’re ready to buy, shop around for the best auto loan offer. Compare rates and loan terms from different lenders to help find the best deal for your financial situation.
Getting preapproved for a car loan can also help you get a sense of the loan terms you might be approved for. A preapproval is a conditional offer that typically includes an estimated loan amount, interest rate and loan term. But remember, preapproval doesn’t guarantee that you’ll get the loan — you’ll need to submit a formal application to know if you’re approved and at what terms.
If you’re still unable to get a car loan, you can also consider getting a co-signer with strong credit to increase your odds of being approved for the loan, or to even get a better interest rate.
After filing for bankruptcy, your best bet is to wait to rebuild your credit before applying for a car loan. But if you must buy now, shop around to find an offer that fits your budget and needs, and then focus on making your monthly car loan payments on time to help build your credit.
Once your credit has improved, you may be able to refinance your car loan and get a better interest rate down the road.