Buying a car can feel stressful enough, but when you have been through bankruptcy it may feel downright terrifying. No matter what the circumstances that led to your filing large medical bills or a job loss, for example you probably feel embarrassed and afraid that no one’s going to want to give you the time of day, much less a decent loan.
Here’s how to get a car loan after bankruptcy.
Assembling Your Credentials1. Consider whether you really need a new car. All major financial decisions deserve serious consideration, and buying a car is no exception. In most cases, vehicle ownership is a household's second largest expense. Consider the complete costs of car ownership (gas, insurance, maintenance, depreciation, property tax, parking and tolls), and determine that you can afford those expenses along with a high-interest car note (5-year $12,000 loan may cost $250-285 monthly, at 10-15% interest rate).
- Delaying the purchase of a new vehicle allows more time to research the best possible deal, more time to save up for a larger down payment, and more time to establish better credit.
- Costs of not owning a car can be considerable – public transportation and taxi service costs add up. Friends or family may expect a reimbursement if they are regularly driving you to work or school, or the grocery store.
- If you are in the 3-5year process of filing Chapter 13 bankruptcy, you need to discuss any new vehicle purchase with your attorney or court-appointed trustee because you will need permission to take on new debt while in a repayment plan. Conversely, Chapter 7 liquidates a debtor’s assets and gives out the money to the secured debtors.
- Trading in an existing car can help toward down payment, but you may be able to get more cash if you sell the car yourself.
- Try to have at least 20% of the sale price – unless you are buying an old car, then 10% is the bare minimum.
- More cash may give you more leverage in negotiating with the dealership. With a 25% or 40% down payment, you might be able to negotiate a lower sales price or better terms for your loan.
- All US Consumers are entitled to a free credit report. US Regulations only entitle you to get a free credit report, not a free FICO Score. Watch out for sneaky attempts to sell additional items that cost money.
- If a pre-bankruptcy car loan is reaffirmed (you continue to pay the loan balance rather than wiping it out), then it should show up on the credit report. If any auto loan payments are not represented on your credit report, go to your dealer/lender to obtain proof.
- Be able to document as many consecutive months of responsible payment history as you can, especially on any existing car loans, but including home mortgage or rent, and utilities.
- Acquire a secured credit card (probably with a minimum $500 cash deposit), or even a high-interest unsecured credit card, and pay the entire balance in full each month.
Exercising Responsible Borrowing1. Get pre-approved for a car loan through a bank, credit union, or online lender before you set foot on the dealership lot. With pre-approved financing, you will enjoy similar benefits as if you were paying by cash or check: better negotiating power, a more streamlined buying process, and potentially reduced financing fees. Gather all of your financial information (pay stubs, copy of credit report, summary of any disability insurance or life insurance), and shop around for the lowest rate.
Start with any banks or credit unions with which you have an existing relationship. If your credit score is too low to qualify, seek out alternative lenders that fund subprime auto loans.
- Investigate prepayment or early payment penalties. You may be required to hold a loan for several years, and pay interest on the balance during those years. These penalties will make refinancing loans more expensive. Refinancing within 6-12 months can be especially important for individuals actively improving their credit.
- Compare rates online (sites devoted to mass submission of your information to various banks, they compete directly with each other for your business). Even with a bankruptcy you are able to use these sites to find competitive rates.
- Tip: Try to set a single day aside to shop everywhere for your pre-approval. Multiple applications for the same type of loan are counted as a single inquiry if the time between the first and last inquiry is less than 14-45 days.
- Compare your pre-approved rate to what the dealer can offer.
- Closely review all the numbers in the sales contract so you are fully aware of what you are paying for the car. Beware hidden costs in the contract for undercoating or other services you don’t need.
- Consider skipping the extended warranty and service contracts. For most people, given the cost, these aren’t going to be worth it.
- Tip: Consider a used car in good working condition with low mileage. Get the vehicle's full history report and verify its maintenance records. Interest rates on loans for used cars are a bit higher, but since the cars cost less, there’s less to finance and the payments will be lower. Depreciation and insurance expenses are much lower.
4. Investigate refinance options every six to twelve months. As a reward for rebuilding your credit, and now that you know where to shop for a good car loans – you are likely eligible for a better car loan.
- Savings at your new lower interest rate (or superior borrowing terms) must be greater than the costs of your new loan combined with any early payment penalties on your existing loan.