Car Loans After Bankruptcy
Although it might seem to the contrary, getting a car loan after bankruptcy isn't impossible. Sure, bankruptcy affects your credit score—which in turn affects your ability to get a car loan—but there are a few tips and tricks (and things to watch out for) that can help you get after bankruptcy auto loans.
Tips for Car Loans After Bankruptcy
When it comes to getting a car loan after bankruptcy, always shop around. Check with different lenders -- whether they're banks, credit unions, or dealerships -- to find the best deal for your situation.
However, aside from shopping around, there are several tips to getting a car loan after bankruptcy.
1. Talk to Your Attorney
First and foremost, talk with your bankruptcy attorney. Some types of bankruptcies require permission before you can take on new debt during your repayment plans.
2. Rebuild Your Credit Score
While getting a car loan after bankruptcy is an effective way to improve your credit score, you can take steps to rebuild your credit before applying for a loan.
Some examples include:
- Paying all of your bills on time.
- Keeping the debt on your existing credit accounts as low as possible.
- Opening new credit accounts only as needed, but using them and making timely payments.
- Generally, unsecured credit lines (those that don't require cash deposits or collateral) are more favorable to credit reports.
- Avoiding moving debt around.
- Pay the debt you owe rather than moving debt from one account to another, such as credit card debt. Sometimes, this strategy can actually lower your credit score.
3. Check Your Driving History
Sometimes, auto loan lenders look at an at-risk buyer's driving history when determining whether to offer a car loan after bankruptcy.
Driving records often show:
- Your driver's license status (valid, suspended, revoked, or cancelled).
- Traffic accidents, violations, and convictions.
- Serious traffic offenses such as driving under the influence (DUI).
Thus, it's important to make sure your driving record reflects all accurate information. Learn more, including how to order a copy of your driving history, at our section on Driving Records.
4. Make a Large Down Payment
Generally, the larger the down payment, the lower the monthly payments. Additionally, larger down payments can also increase your chances of getting a car loan, as bigger down payments lessen the risk your lender is taking.
5. Consider Getting a Co-Signer
Typically, lenders are more likely to provide a car loan after bankruptcy if you have a co-signer with good credit. This is because your co-signer will help take on the risk of the loan.
Note that the co-signer is responsible for any unpaid balance if you default on the loan.
6. Eventually Refinance Your Car Loan
Once you get a car loan after bankruptcy, and you've had the loan long enough to give yourself some time to rebuild your credit, consider refinancing your auto loan.
Refinancing could give you much better interest rates than you got with your bad credit car loan, which could in turn lower your monthly payments and make it even easier to continue rebuilding your credit after bankruptcy.
Dangers of Loans After Bankruptcy
Unfortunately, some buyers fall victim to unsavory deals.
1. High Interest Rates
Often, getting a car loan after bankruptcy usually means paying high interest rates. Shopping around with various lenders can help you get the lowest rates possible, but even those still might be on the higher end.
Admittedly, you can't always avoid high interest rates; fortunately, though, you can wait until your loan is old enough to have helped rebuild your credit and then apply to refinance your auto loan.
2. “Buy Here, Pay Here" Dealerships
Many “buy here, pay here" dealerships specialize in providing auto loans to people with bad credit—such as those who've filed for bankruptcy. Often, those car loans come with high interest rates, and the cars themselves might not be very reliable.
Additionally, “buy here, pay here" dealerships operate on another lender's money, meaning they need to sell inventory as quickly as possible to avoid paying loans on unsold vehicles. This can lead to a “cash crunch," which in turn can lead to the “buy here, pay here" car dealership going out of business.
Of course, not all “buy here, pay here" dealerships are unstable options. Do your research (such as checking the dealership's rating with the Better Business Bureau) and make sure the car dealership reports your loan to the credit bureaus so you can begin rebuilding your credit history.
Improve Your Credit Score
Simply put, your credit report is made up of a mix of credit lines (such as mortgages, credit cards, etc.), and this is a good thing. Adding a car loan to the mix shakes things up, and can help your overall credit score—especially when you make payments on time and show future lenders you're less of a loan risk.
NOTE: Unfortunately, having an underwater auto loan (also known as an “upside-down car loan") can reflect poorly on your overall credit history. Being upside down on your auto loan means you owe more on the car loan than the car is actually worth.
This isn't always an easy—or immediately feasible—fix, especially for people who are dealing with bankruptcy and bad credit. You can learn more about upside-down auto loans and how to get above water in our section on Upside-Down Car Loans.