How to get a car loan after bankruptcy

Buying a car can feel tense enough, but when you have been through bankruptcy it may feel downright appalling. No matter what the circumstances that led to your filing — large medical bills or a job loss, for example — you very likely feel embarrassed and afraid that no one’s going to want to give you the time of day, much less a decent loan.

“The most significant thing to know is that you do have options,” says Phil Reed, senior consumer advice editor for the car buying platform Edmunds.com. He says lenders are interested in working with borrowers who are recovering from financial problems, and in fact some dealerships are antsy to sell them a car. “You shouldn’t assume that no one will talk with you and that you have to take whatever someone will give you,” he says.

Here’s how to get a car loan after bankruptcy, step-by-step. (By the way, this advice also applies to someone in the process of a Chapter thirteen bankruptcy which usually takes five years to accomplish. The difference there is that you need to talk with your attorney because you will likely need permission to take on fresh debt while in a repayment plan.)

1. Get your credit reports and credit scores

Yeah, checking your credit most likely feels a little like pulling a bandage off a big gaping wound. It’s not going to be pretty. But the lender is going to check your credit, so you might as well know what they are going to see. Besides, it’s always a good idea to review your reports after bankruptcy because mistakes are not uncommon.

You can get your free annual credit reports from AnnualCreditReport.com and you can get a free credit report summary from Credit.com that explains how lenders are likely to view your information. Albeit the lender will pull a customized credit score that likely differs from the one you see, it will still give you an idea of where you stand in general.

Pay particular attention to what the report says about previous auto loans, since those are often more strongly weighted in the credit scoring models used by auto lenders. Positive on-time car loan payments reported during and after bankruptcy can be helpful.

Connecticut bankruptcy attorney Eugene Melchionne suggests asking yourself the following questions: “Was there a previous car loan involved in the bankruptcy? Was that car loan reaffirmed?” (When you reaffirm the loan you agree to proceed to pay the loan balance rather than wiping it out.) “If the loan is reaffirmed, then the tradeline (account) should be demonstrating up on the credit report.”

If you did not reaffirm a loan on a car you held onto in bankruptcy, then the account most likely won’t be on your credit reports, even if you have continued to make payments. “In that case, I have the borrower go the dealer/lender ready with proof of post-bankruptcy payments to create the history,” Melchionne says.

Two. Put together a down payment

Hopefully wiping out debt in bankruptcy improved your cash flow enough that you can save some money for a down payment. “I tell my clients to plan on living an entire year on a cash-only basis and build up savings before getting back into the credit game,” says Melchionne. The larger your down payment, the less risk your lender is taking. After all, they also have your vehicle as collateral. Need a set of wheels right away but brief on cash? A trade-in can help toward a down payment, and you may be able to get more cash for your current vehicle if you sell it yourself.

Gather all your financial information (pay stubs, copy of your credit report, etc.) and dedicate a day to getting preapproved for a car loan. It’s a good idea to limit your shopping to a single day to minimize the potential influence numerous inquiries may have on your credit scores.

Ideally, attempt to get preapproved before you visit the dealership. “Like any car buying expedition, you have the best leverage if you get approved for a loan before you shop,” Northern California bankruptcy attorney Cathy Moran says.

If your bankruptcy is latest and you haven’t been able to embark to rebuild your credit, you will most likely wind up with a higher-rate loan. According to Experian Automotive data, the average auto loan rate for someone with deep subprime credit (VantageScore credit score of three hundred to 500) was 13.29 percent for a fresh vehicle and Eighteen.95 percent for a used one. (All figures as of fourth quarter 2014.) And the average fresh vehicle payment for someone in that credit score range was $497, while the used vehicle payment averaged $373.

“If you have an suggest in forearm you can always then attempt the dealership,” Reed says. “Fairly often they will suggest to match it or hit it.”

Don’t assume a “buy here, pay here” dealer is the only one who will work with you. Instead, make that your absolute last resort. “The interest rate will most likely be sky high and often it is quoted per month, not per year,” Reed cautions. Plus, “you don’t get a excellent selection of cars and they may be unreliable” he says, which means you could be stuck with a car payment and large repair bills at the same time.

Also be very cautious about any auto financing contract before you sign on the dotted line. Subprime borrowers can lightly end up in predatory loans. It’s significant to make sure there aren’t hidden costs in the contract (for undercoating or other services you don’t need, for example) and that you can cosily afford the payments. If you default on this loan, bankruptcy may not be an option because of your latest filing, so you want to be extra careful.

Your vehicle loan can help you improve your credit after bankruptcy, provided you make your payments on time. How much can it help?

Equifax compared consumers with deep subprime credit scores (below 550) over a three-year period and found that those who took out an auto loan during that time period had larger increases in their credit scores compared to those who did not. Specifically, the median improvement in scores for those who did take out a vehicle loan was fifty two points. The report titled Subprime Auto Loans: A 2nd Chance at Economic Chance states, “This is a 62.5% improvement over the group that did not take out an auto loan, who only improved by thirty two points. Even more telling, those that took out an auto loan were four times more likely to have improved their score above six hundred forty compared to the consumers who did not take out a loan.”

Monitor your credit scores after your bankruptcy. Hopefully you will find that once you’ve paid your loan on time for six to twelve months and have been building better credit, your scores have improved. If so, you may be in a position to refinance your car loan at a lower interest rate. (Of course that’s never assured, so don’t take out an expensive car loan thinking you’ll just refinance later.)

And one more peak: If you are reading this because you are contemplating filing for bankruptcy but drive an unreliable car, you may want to substitute it sooner rather than later. “I end up sending a fair number of clients out to buy a car before they file bankruptcy,” says Moran. “My thinking is that many are more creditworthy, at least in the car-buying context, than they give themselves credit for, and they often qualify for manufacturer-underwritten loan terms.” But those clients don’t get a “free” car. “The deal is, they pay that eve-of-bankruptcy loan in total according to the terms of the deal, despite the bankruptcy filing,” she says.

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