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Getting a car loan after bankruptcy

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Applying for a car loan after experiencing bankruptcy can feel daunting. And while it’s true that receiving a competitive loan after bankruptcy can take some extra leg work, it is still possible. That work is going to include checking and improving your credit while considering the additional hoops you may have to jump through. 

Types of bankruptcy 

There are two primary types of bankruptcy. Before moving forward with a new loan, it is important to understand the specifics of which you filed for. 

Chapter 7 bankruptcy   

The court takes legal ownership of some of your possessions when you file for Chapter 7 bankruptcy, and thus a temporary stay will be placed on your current debts. The process typically takes between 80 and 130 days to complete and could potentially remain on your credit report for up to 10 years.  

Chapter 13 bankruptcy   

Filing for chapter 13 bankruptcy — also known as a wage earner’s plan — allows filers to create a plan in order to pay off accrued debts. Following court approval, the plan typically includes paying fixed amounts over a period. It can remain on your credit report for only up to seven years.  

How to get a car loan after bankruptcy 

Before signing off on a car loan application there is some clean-up that must be done to prove to lenders that you can pay off your loan. Take a few extra steps in order to receive approval and the most favorable terms.   

Step 1. Check your credit  

Since filing, your credit score has expectedly shifted. While there’s no set point drop in your credit score after a bankruptcy, it does carry less weight as time passes, so you will likely see a better number in your last year than you will in your first.  

The better your credit is, the more favorable your terms will be. Your score can be found through credit bureaus — the main three being Experian, TransUnion and Equifax. It is recommended to gauge where your credit stands prior to diving into a new loan application. This way you can be more confident you are getting the best deal.   

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Improve your credit
Because your credit takes a hit following bankruptcy it’s in your best interest to improve your score ahead of shopping.

Step 3. Budget for a vehicle down payment 

Making a down payment will greatly increase your odds of approval and could even save you money by lowering your interest rate range. Use a down payment calculator to see how much money you could save with various amounts.  

Step 4. Shop around  

The key to finding the best deal comes down to comparing many different lenders and keeping an open mind to more than just the most recent car models. Consider the pros and cons of a new versus used vehicle and get a few offers before signing off.  

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Apply for loan preapproval
Before heading into a dealership, it is a good idea to apply for loan preapproval. It does not ensure loan approval, but it will give you negotiation power and a firm understanding of your budget.

What to remember following bankruptcy 

While a financed vehicle is possible after filing for bankruptcy, there still are some important considerations to look out for. 

Beware of predatory lenders 

As a potential loan holder with less than favorable credit, you will likely be met with predatory lending options. This type of lender will likely boast guaranteed financing or no credit check. These options can many times lead to you becoming upside down on your loan due to their high-interest rate approach.  

Understand the pros and cons of longer loan terms  

Similarly, you may be met with long-term loan options. These stretched-out loans can be a risk, especially at seven or more years. A longer loan term is yet another scenario where you are more likely to become upside down on a loan.  

Consider a co-signer 

If your credit score is still lacking, consider applying for a loan with the help of a co-signer. You will be more likely to receive approval because lenders will feel added comfort via the co-signer’s credit score.  

Next steps 

Lenders are more likely to approve loans of drivers if they are confident in their ability to pay, but a history of bankruptcy does not bar you from meeting that standard. Be patient and deliberate in the process and take time to improve your credit prior to searching for a loan. 

Written by
Rebecca Betterton
Auto Loans Reporter
Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers in navigating the ins and outs of securely borrowing money to purchase a car.