Can I buy a car after Chapter 7 bankruptcy?

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After you’ve gone through Chapter 7 bankruptcy, it can remain on your credit report for up to 10 years from the filing date. During this time period, you might need to buy a car. You might think buying a car after bankruptcy is impossible, especially if you want to finance the purchase.

However, in some cases, a lender will allow you to buy a car after bankruptcy. To compensate for the increased risk, it may charge you a higher interest rate or require a larger down payment.

Should I buy a car after bankruptcy?

The answer to this question depends on your financial circumstances and transportation needs. If you find yourself needing a car after bankruptcy, you should consider purchasing one that’s affordable. Having a reliable vehicle is important if you need to commute to work every day or drive for a living.

However, if you already have reliable transportation, it’s best not to buy a car you don’t need. That way, you can avoid taking on debt you can’t afford to pay back.

You could use cash to pay for the car if you have enough saved. If you don’t have enough money to pay for it that way, taking out an auto loan is another option.

Financing your car with an auto loan after bankruptcy

When trying to finance your car with an auto loan after bankruptcy, you may face a tougher time finding a lender — some will be reluctant to work with you. Also, once you find a lender willing to let you borrow money, you probably won’t qualify for the best auto loan rate. For example, according to a 2020 automotive industry report by Experian, borrowers who have credit scores in the 501-600 range pay an average APR of 10.36 percent for new cars and 16.4 percent for used ones. In addition, some lenders will require that you make a higher down payment.

  • Buy-here, pay-here dealerships: During your search, you may encounter buy-here, pay-here dealerships that don’t require credit checks. Although these dealerships will work with you if you’ve had a bankruptcy, you can end up paying more than the car is worth. Before using this option, do your research and inquire about hidden fees.
  • 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 there. Plus, you might be able to secure a lower interest rate.
  • Co-signer: If those options don’t work, another option would be getting someone with good to excellent credit to co-sign an auto loan for you. Before going this route, explain to the person what rights they have as a co-signer. In the unfortunate event that you default on your loan, the co-signer will be responsible for the payments, and it could negatively impact their credit.

When should I buy my car?

Although the right time to buy your car varies depending on your financial circumstances, the best time to buy a car is when you can score the best deal and interest rate. Waiting until your credit score improves to purchase a car could reduce the interest rate a lender offers you. But if you can’t wait and need transportation now, search for the best deal.

Because of COVID-19, some car manufacturers were forced to close their factories for months and saw inventory and sales decline. According to J.D. Power, automobile sales were down 14.6 percent last year compared to 2019. As a result of this lower demand, some dealers ran incentive programs to encourage people to buy. Some even have discounts for first responders.

If you’re in need of a vehicle, now might be the best time to look. But do your due diligence and don’t purchase a vehicle you can’t afford.

The bottom line

While you can purchase a car after bankruptcy, you should do so only if you can afford it. When financing an auto loan, expect to pay a higher interest rate. Although waiting for your credit score to improve can lower your rate, sometimes it’s not possible. Research all of your lending options before you take out a loan. Take advantage of available dealer incentives, and try to avoid dealerships that charge hidden fees.

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Written by
Jerry Brown
Contributing writer
Jerry Brown is a contributing writer for Bankrate. Jerry writes about home equity, personal loans, auto loans and debt management.
Edited by
Associate loans editor