The ability to get credit after bankruptcy is a major concern that I regularly hear about from my bankruptcy clients.
But where do debtors stand as far as being able to get auto financing after emerging from a consumer bankruptcy case? Here’s some information about getting a bankruptcy car loan.
It now seems that auto makers are eager to increase sales by greatly expanding the pool of loan applicants.
Auto lenders scaled back their lending during the financial crisis of the past few years. However, as reported recently in the New York Times, banks, as well as the lending arms of automakers, have entered into a new campaign to issue car loans more aggressively.
All borrowers, including those with tarnished credit histories, are finding it much easier to obtain vehicle financing compared with a few months ago.
Even consumers with sub-prime credit ratings are finding it much easier to get car loans now.
As we move through the recession, lenders are relaxing their standards for extending credit. For those emerging from bankruptcy, this is great news.
Getting a Car Loan After Filing for Bankruptcy
Car loans are often easier to get than credit card accounts after emerging from bankruptcy since car loans are secured debts. Thus, if you default, the lender has the legal right to repossess the vehicle which is the secured collateral. Credit card companies do not have such rights.
Here are ten tips about bankruptcy car loans:
1. Interest Rates and Down Payments
Most people seeking car financing after bankruptcy are able to get it — the key issues being the rate of interest and the amount of down payment required. Thus, almost anyone emerging from a bankruptcy proceeding should be able to get a car loan, although some lenders will require a relatively high rate of interest, and other lenders may require a significant down payment, or both.
However, as it appears that we are heading out of the recession, lenders are becoming anxious to originate more car loans. This means that consumers who have a bankruptcy in their past will likely be able to get financing at much more competitive rates — perhaps a lower rate of interest than before, or less of a down payment.
Even if you only qualify for financing at a relatively high interest rate, remember that the loan need not last forever. Although most car loans are for a period of several years, you can always try to refinance the car a year or two later when your credit is even better, in which case the interest rate should be significantly lower.
2. Consider Getting a Co-Signor
Another option to get a better financing deal is to find someone, typically a family member, who is willing to co-sign the car loan. Doing so will increase your chances of getting approved since it will reduce the amount of risk to the lender.
3. Discharge Usually Necessary
In order for a consumer emerging from bankruptcy to obtain financing, usually the bankruptcy case need not be over, but the Court must have issued an order of discharge.
A significant benefit of the bankruptcy discharge is that all dischargeable debts will be zeroed out on a credit report.
4. Car Loan Can Help Rebuild Credit
Another benefit of getting a car loan after bankruptcy is that it will help you reestablish credit. Showing that you can handle new credit after bankruptcy will make it easier to get additional accounts later on. Installment loans such as car financing are especially good at rebuilding credit, provided of course that you make regular and timely payments.
When you have a loan with regular payments, and you make them on time, a credit report indicates a “paid as agreed” status, which also gives positive points to your overall credit score.
5. Standard Qualifications Remain
Even without a bankruptcy, someone applying for a car loan needs to be able to demonstrate that they have a stable job, and sufficient income to be able to make the car payment as well as day-to-day expenses and obligations.
6. Bankruptcy On Your Credit Report Becomes Less Important Over Time
Also keep in mind that the more time that passes from the date of the bankruptcy filing, the less the bankruptcy will impact your credit score.
Generally, the first one-year period after filing is the most sensitive, and the bankruptcy will have the most negative weight. However, after that, the bankruptcy becomes less important over time as far as the credit score is concerned.
7. Consider Re-Establishing Credit First
If you don’t need to finance a car immediately after emerging from bankruptcy, you should first concentrate on rebuilding your credit. The better your credit, the better the terms of the car loan.
8. Consider a Used Vehicle
Most of the best deals can be gotten for a late-model, used vehicle. They will be less expensive and will offer the most bang for the buck.
Also, the less the car is, the less financing you will need.
9. Approach Your Prior Lender
If you currently or previously had a financed vehicle, and you made all of the payments, your best bet may be to seek car financing from the same lender. They already know you and they also know that you made all of the necessary payments.
However, if a prior lender repossessed one of your cars in the past, that lender may not have such fond memories of you, and may prefer not to deal with you again so soon.
10. Be a Smart Shopper
Whether emerging from bankruptcy or not, the same rules apply in searching for a car loan — shop several lenders and car dealers to get the best deal.
Terms can differ dramatically from one lender to the next so definitely shop for the best rates. Also, some lenders specialize in offering loans to those with sub-prime credit