Bankruptcy can feel like a major setback, but it doesn’t have to be a permanent roadblock to car ownership. While securing a car loan after bankruptcy may be challenging, it’s certainly possible. This guide will walk you through the steps to rebuild your credit, find lenders willing to work with you, and ultimately drive off the lot in your new vehicle.
Let’s dive into how to get a car loan after bankruptcy.
Can I get a car loan after bankruptcy?
Yes, getting a car loan after bankruptcy is possible, but it will likely require more effort than usual. Here’s why:
- Lower credit scores: Bankruptcy filings stay on your credit report for 7-10 years, impacting your credit score. Lower scores mean higher interest rates and potentially stricter loan terms.
- Limited lenders: Some lenders may be hesitant to offer loans to those with recent bankruptcies. However, there are lenders who specialize in working with borrowers with less-than-perfect credit. Just be prepared for higher interest rates and potentially stricter loan terms.
The key to your long-term success is to focus on rebuilding your credit. Make on-time payments for all your bills, save for a down payment (reducing loan amount), and consider a co-signer with good credit to improve your application’s strength.
MoneyLion offers a free and convenient way to find offers from our trusted partners to help you improve your credit — such as credit monitoring, credit report disputes, and getting credit by paying bills. A good credit score can lead to lower interest rates and increased borrowing power on loans and credit cards.
Chapter 7 bankruptcy
Securing a car loan after a Chapter 7 bankruptcy is possible, but requires strategic planning. Here’s what you need to know:
- Credit score impact: Chapter 7 filings stay on your credit report for 7-10 years, significantly lowering your score. This translates to higher interest rates and potentially shorter loan terms offered by lenders.
- Lender options: Some lenders may be cautious, and you may have to settle for higher interest rates if you do receive a car loan.
- Building your case: Focus on rebuilding your credit by making on-time payments for all bills. Saving for a down payment (reducing the loan amount) strengthens your application. Consider a co-signer with good credit to improve your chances of approval.
- Waiting period: While there’s no set timeframe, lenders often prefer to see 1-2 years of credit rebuilding before offering favorable loan terms.
By diligently rebuilding your credit and taking these steps, securing a car loan after Chapter 7 bankruptcy can become more achievable. Remember, responsible credit management over time will open doors to even better loan options in the future.
Chapter 13 bankruptcy
Navigating car loans after a Chapter 13 bankruptcy differs slightly from Chapter 7. Here are some ways they’re different:
- Ongoing repayment plan: Unlike Chapter 7 where debts are discharged, Chapter 13 involves a court-ordered repayment plan for 3-5 years. This ongoing obligation may impact lenders’ willingness to approve a car loan during the repayment period.
- Court approval: If you need a car during your Chapter 13 plan, you’ll likely need court permission to take on additional debt. This involves demonstrating the necessity of the car and your ability to afford the extra payment without jeopardizing your existing repayment plan.
- Post-discharge opportunities: Once your Chapter 13 plan is completed and discharged, car loan options will expand. Focus on rebuilding credit by making on-time payments and consider a down payment to improve your loan terms.
Focus on rebuilding credit and saving for a down payment to secure a favorable loan after your plan is complete.
How to get a car loan after bankruptcy
Now that you understand the basics, it’s time to pin down the finer details of securing a car loan after bankruptcy.
1. Check your credit
Knowing your credit score is crucial. You can access a free credit report annually from each of the three major credit bureaus. This report details your credit history, including past debts, payment history, and credit utilization. Reviewing your report regularly is important for spotting any errors that could be lowering your score.
2. Get serious about rebuilding your credit
Rebuilding credit takes time and dedication. Here are some strategies to get you started:
- Become an authorized user: Ask a friend or family member with good credit to add you as an authorized user on their credit card. This allows their positive payment history to contribute to your score.
- Secure a credit builder loan: These specialized loans are designed to help rebuild credit. You make regular payments towards a savings account held by the lender. Once the loan is paid off, you receive the saved funds along with a boost to your credit score.
- Maintain on-time payments: Making on-time payments for all your bills (rent, utilities, etc.) is crucial for credit improvement. Consider setting up automatic payments to avoid missed deadlines.
By consistently practicing these strategies, you shouldgradually see your credit score rise, making you a more attractive borrower for car loans.
Monitor your credit with the MoneyLion app today!
3. Save up for a larger down payment
Having a larger down payment strengthens your car loan application in two key ways:
- Lower loan amount: A bigger down payment translates to a smaller loan amount. This reduces the lender’s risk and potentially qualifies you for lower interest rates. When it comes to a car loan after bankruptcy, offering a larger down payment can help make you look like a more attractive prospect.
- Stronger application: Saving demonstrates your financial responsibility and improves your application’s overall strength in the lender’s eyes. Again, it boils down to lenders viewing you as a less risky applicant if you can cough up a larger down payment.
If possible, wait until you have enough cash to put down at least 20% on your car loan. If you can offer up more, your odds for approval may increase.
MoneyLion offers a convenient marketplace to compare high-yield savings accounts from our trusted partners that could help grow your money.
4. Shop around for lenders
Don’t settle for the first loan offer you receive. Securing the best car loan after bankruptcy requires comparing rates and terms from multiple lenders. Here’s how to effectively shop around:
- Credit unions: Consider credit unions, known for offering favorable rates to members.
- Online lenders: Explore online lenders specializing in loans for borrowers rebuilding credit. They often cater to a wider range of credit profiles.
- Traditional banks: Don’t exclude traditional banks — some may offer competitive rates for your situation.
- Compare loan offers: Once you have quotes from various lenders, make sure to compare the Annual Percentage Rate (APR), loan term, and any additional fees. Choose the offer that best suits your budget and long-term financial goals.
How to increase your approval for a car loan after bankruptcy
Looking for a way to increase your approval odds for a car loan after bankruptcy? Consider these tips.
Choose an affordable car
Opting for a less expensive car translates to a smaller loan amount. This lowers the lender’s risk and could make your application more attractive, potentially leading to greater approval odds. Plus, an affordable car will likely also mean a smaller monthly payment, which can help save you money.
Consider getting a cosigner
Having a cosigner with a good credit history significantly strengthens your application. A cosigner with a strong credit score can help reassure the lender and increase the likelihood of loan approval.
Show steady income and employment stability
Demonstrating consistent income and stable employment proves your ability to manage loan repayments effectively. Make sure to provide documentation like pay stubs and employment verification letters to bolster your application.
And if you’re looking for extra ways to boost your income, make sure to check out our guide on how to make more money or the best side hustles in 2024.
What to consider with a car loan after bankruptcy
Just because you can qualify for a car loan after bankruptcy doesn’t mean you should make a purchase. There are many points you must consider before going down this path.
High-interest rates
Due to your lower credit score, lenders perceive you as a higher risk. This translates to higher interest rates on your car loan, meaning you’ll likely pay more in total interest over the loan term.
Long terms
Lenders may offer longer loan terms to make the monthly payments more manageable for your post-bankruptcy situation. While this can ease the monthly burden, it also extends the repayment period, potentially leading to higher total interest paid due to compounded interest.
Difficult to obtain approval
Qualifying for a car loan after bankruptcy can be challenging. Lenders may have stricter requirements, and you might face rejection from some lenders. Persistence and a focus on rebuilding your credit score can increase your approval chances.
Car loan after bankruptcy is possible
There are pros and cons of filing for bankruptcy. Your goal is to take advantage of the benefits while minimizing any potential pitfalls.
It’s more challenging to get a car loan after bankruptcy, but as noted above, there are steps you can take to make it happen. By following each one, you’ll find yourself on the right path to buying a vehicle that suits your new financial circumstances.
FAQ
How long after bankruptcy can you get finance?
There’s no set waiting period, but lenders often prefer 1-2 years for credit rebuilding.
How fast can your credit score go up after bankruptcy?
It depends on your credit history and rebuilding efforts. It can take several months to a year for significant improvement.
Can a car loan be kept after bankruptcy?
Yes, you can usually keep a financed car after bankruptcy, but you’ll still be responsible for the loan payments.
Does bankruptcy clear car payments?
No, bankruptcy doesn’t eliminate existing car loan obligations. You’ll need to keep making payments.
Will bankruptcy affect getting a car?
Yes, bankruptcy will affect getting a car loan, but it’s still possible. Expect higher interest rates initially.
Can I get a good car loan after one year of filing for bankruptcy?
It depends on your credit score after one year. With strong rebuilding efforts, you might get a decent loan, but lower rates may take longer.
