Getting a car loan after bankruptcy

Applying for a car loan after bankruptcy can feel daunting. And while it’s true that receiving a competitive post-bankruptcy car loan 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 your nonexempt possessions when you file for Chapter 7 bankruptcy. During this process, a temporary stay is placed on your current debts until the court redistributes the proceeds of your property to your creditors. This type of bankruptcy remains 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 predetermined period, usually three to five years. It can remain on your credit report for up to seven years.

How long after a bankruptcy can you get a car loan?

Although there isn’t a fixed period of time after bankruptcy when you’re “allowed” to apply for a car loan, lenders may require your bankruptcy to be at least 12 to 24 months in the past.

When deciding whether to approve your car loan application, a lender typically runs a credit check. This step is meant to review your past borrowing habits and the likelihood you’ll repay the loan on time without defaulting.

You could apply for a car loan as soon as your bankruptcy case closes. However, you’ll likely face challenges getting approved for a new loan without a co-signer because of the bankruptcy on your credit report.

That said, some lenders specialize in car loans for borrowers with bad credit or offer flexible lending criteria if you meet other requirements.

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

A bankruptcy on your credit file significantly lowers your score.

Bankruptcy adversely affects your credit for seven to 10 years, but it’s weighted less as it ages. This means your credit score will likely be higher in your ninth year of having a bankruptcy on your report compared to immediately after bankruptcy.

The better your credit is, the more favorable your borrowing terms.

Check your credit score before diving into a new car loan application. This way, you can be more confident about where you stand as an applicant. The main three credit bureaus — Experian, TransUnion and Equifax — can provide you with your credit score.

Step 2. Budget for a vehicle down payment

Making a down payment often increases your odds of approval and saves you money by lowering your interest rate. It’s especially important if you have a low credit score due to bankruptcy — you’re lowering the amount you borrow, which means less risk to the lender.

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 3. Shop around

The key to finding the best car loan is comparing offers from many lenders. You can find new and used car loans from a few sources:

• Credit union: These not-for-profit lenders may be more willing to work with borrowers who have credit challenges, especially if you already have a banking relationship with them.
• Online lenders: They typically set lower minimum credit scores than traditional lenders and may consider creditworthiness factors beyond your credit score.
• Subprime lenders: These lenders — which may be online or brick-and-mortar — specialize in working with low-credit-score applicants, but beware of potentially high rates.

When getting a post-bankruptcy auto loan, consider the pros and cons of a new versus used vehicle and get a few offers before signing off.

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 encounter predatory lending options, like buy-here, pay-here lenders. These lenders sell their own inventory of vehicles and provide financing in-house. A common sign you’re dealing with a buy-here, pay-here lender is if it boasts guaranteed financing or no-credit-check loans.

The danger of these options is their sky-high interest rates and extra fees that can put you upside down on your loan.

Understand the pros and cons of longer loan terms

Similarly, you might be offered long-term loan options. These stretched-out loans can be a risk, especially at seven or more years. A longer loan term can be appealing because it results in a low monthly payment, but you’ll pay more interest over time.

Consider a co-signer

If your credit score is lacking, consider applying for a loan with the help of a co-signer. A co-signer is an individual with strong credit who’s added to your loan agreement. Your co-signer is responsible for making loan payments if you fail to pay on time.

This acts as a layer of protection for the lender and might improve your chances of getting approved.

Bottom line

A bankruptcy can add a few hurdles 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 score can help you secure a car loan after bankruptcy.

If you have a willing co-signer with good credit, they may help boost your odds until you can qualify on your own.