How To Get A Car Loan After Bankruptcy

While it’s true that receiving a competitive rate on your auto loan after bankruptcy is more difficult, it’s still possible. To get started, prioritize improving your credit and finding lenders with flexible eligibility requirements — and be prepared to refinance in the future once you qualify for a lower interest rate.

How to get a car loan after bankruptcy

Step 1. Review your finances

When thinking about a post-bankruptcy car purchase, consider affordability, your current transportation and adding a cosigner, among other factors.

• Affordability: Purchase a car that’s well within your budget by calculating the cost of ownership, not just the sticker price. Lenders will want to see that you have a steady income with enough left over every month to comfortably cover your car payment.
• Current transportation: If you already have reliable transportation, hold off on buying a car. Your interest rate will likely be high with bankruptcy still on your credit report. Instead, focus on improving your credit scores and saving for a large down payment.
• Using cash: You can skip an auto loan entirely by paying cash, although finding a reliable, budget-friendly vehicle may be difficult in today’s market. Follow the steps to buy a used car or rely on your personal network to find an affordable car.
• Higher interest rates: When you have a bankruptcy on your credit report, your credit scores takes a hit. You will only qualify for high auto loan rates — if you qualify at all — that will increase the total cost of buying your car.
• Predatory lenders: Finding a lender after bankruptcy may expose you to predatory sales and lending practices. Keep an eye out for deceptive or unethical lending terms while comparing your options.
• Adding a cosigner. Reach out to someone with good to excellent credit to cosign an auto loan for you. The benefits of a cosigner include increased odds of approval and more favorable terms, but make sure they understand their rights and responsibilities as a cosigner before you borrow.

“Taking on new debt after bankruptcy can be risky because of the time restrictions on filing again,” says Jay Fleischman, managing attorney at Moneywise Law. If you fall behind on payments, you won’t be able to discharge your new debt for years.

He advises consumers to create a budget to determine how much they can afford for vehicle costs. That includes monthly payments, insurance, fuel and maintenance.

“Save that amount of money consistently for at least four months so you know your budget is realistic and to build up a cushion in case you run into financial difficulties,” Fleischman advises.

Step 2. Check your credit

A bankruptcy on your credit file significantly lowers your credit scores for seven to 10 years, but it’s weighted less as it ages. This means your credit scores will likely be higher in your ninth year of having a bankruptcy on your report compared to immediately after declaring bankruptcy.

Fleischman recommends reviewing your credit scores 120 days after your bankruptcy case concludes and taking steps to correct any errors or inaccuracies. “Though you can qualify for an auto loan as soon as six months after a discharge, your chances of getting an affordable interest rate increase over time.”

The better your credit is, the more favorable your borrowing terms. Check your credit scores regularly and take steps to rebuild your credit before starting a car loan application. Remember, you have a different credit report with each of the three major bureaus — Experian, TransUnion, and Equifax — and will need to monitor them all.

Step 3. Budget for a down payment

“While you’re waiting [for your bankruptcy to conclude], save as much as possible for a down payment because that will make for a stronger application and lower monthly costs,” Fleischman advises.

Making a down payment often increases your odds of approval. It shows lenders you are responsible enough to save up before a big purchase. A down payment is especially important if you have poor credit due to bankruptcy. By lowering the amount you borrow, you decrease the lender’s risk.

As a bonus for you, borrowing less money means paying less in interest over time. Experts suggest providing a down payment of at least 20 percent, but if that’s out of reach, do what you can. Use a down payment calculator to see how much money you could save with various amounts.

Step 4. Shop rates with multiple lenders

Shop around with at least three lenders to ensure you know your loan options and get the best possible auto loan rate for your credit. Look for lenders that clearly state their credit requirements and allow prequalification with a soft credit check. That way, you can check your approval odds and preview likely rates without hurting your credit.

Then, before heading into a dealership, apply for loan preapproval. Preapproval may require a hard credit check, but a preapproved offer holds more weight than prequalification. This will give you negotiation power at the dealership and a firm understanding of your budget.

If you plan on buying from a dealership, you can also apply for dealership financing to see what terms you can get. Having preapproval from a different lender may help you secure a lower rate with the dealership’s finance partners, although it will likely still be higher than average.

Types of bankruptcy

The two most common types of bankruptcy are Chapter 7 and Chapter 13. Before moving forward with a new loan, it is important to understand the specifics of what you filed for and how it will impact your next car purchase.

For instance, if you filed for Chapter 7 bankruptcy, discharge notices are typically provided by the court about 90 days after a required step in the process known as your 341 meeting of creditors. It is highly recommended that you wait until after your 341 meeting to purchase a vehicle.

The timeline is longer for those who filed for Chapter 13 bankruptcy. This type of bankruptcy can take three to five years to complete, and while you can buy a car during the process, it will require permission from the court.

Where to finance a car loan after bankruptcy

Bankruptcy doesn’t have to stop you from securing an auto loan. However, keep in mind your lender options may be limited, and you’ll likely get hit with a high interest rate. The best auto loan rates are reserved for borrowers with good to excellent credit.

• Bad credit lenders. Bad credit lenders have flexible lending requirements. That makes them an option for borrowers who have filed for bankruptcy. These lenders, such as Upstart and Autopay, may approve borrowers with FICO scores in the 500s.
• Credit unions. If you’re a member of a credit union, you can try applying for an auto loan there. Since credit unions are not-for-profit, member-owned organizations, you may have better luck securing financing. Plus, you might be able to qualify for a lower interest rate.
• Buy-here, pay-here dealerships. During your search, you may encounter buy-here, pay-here dealerships that don’t require credit checks. As appealing as this option may be, it should be your last resort. Due to high interest rates, you may pay more than the car is worth.

If you plan to purchase a car after bankruptcy, it’s best to wait as long as possible after a bankruptcy to apply for a car loan. Those who need a loan sooner will need to shop around to find lenders that work with people who recently finished bankruptcy proceedings.

Bottom line

A bankruptcy can add a few obstacles to your car-financing experience, but it’s not always a complete dead end. Having a steady, reliable income and working on improving your credit scores can help you secure a car loan after bankruptcy. Research all your lending options before you take out a loan to work and secure the best rate available.