How Bankruptcy Affects Buying a New or Used Car
After a bankruptcy is finalized, your credit score will probably plummet. However, that does not mean you can't get a loan to buy a new or used car. Car loans will have higher interest rates, and you may not be approved for exactly the car you want, but the dealership still wants to sell to you. Even better, your car loan may be the perfect vehicle for rebuilding your credit rating.
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Loan Approval
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After your bankruptcy, lenders know two things: you can't bankrupt their loan for eight years afterward and you probably need credit more than someone who has not filed a bankruptcy. Large national finance companies and car lot financing companies are both willing to take a chance on your credit, especially with your new car as collateral.
To obtain loan approval, you will probably need a larger down payment and good documentation of your work history and income level. Your lender will also expect complete honesty from you about your credit history and current financial situation.
Interest Rates and Repayment Schedules
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Car loans after bankruptcy will not come with advertised teaser deals of low interest or no down payment. Instead, you will have to pay a higher interest rate along with your substantial down payment. Lenders will want repayment schedules to be abbreviated, so you'll only get four or five years instead of seven or eight to repay the same amount of money. That means higher payments, which means you may need to choose a cheaper car.
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Payment Options
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Especially if you finance on-lot, you may find repayment options to be more constrained with an after-bankruptcy loan than with a traditional loan. For instance, some loan companies won't allow for early repayment or charge a substantial penalty for early repayment. Others charge up-front fees that are folded into the loan. Repayment schedules may be tough, with a single late payment triggering a repossession of your car. A wise borrower will read all the fine print and take a day or two to think about the loan before signing the contract.
Precautions
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Some car dealers advertise that they specialize in bankruptcy and bad credit. While that's fine, a standard dealership that does not advertise this may give you an equally good or better deal on the same car. You should also not assume you can only get a loan on a used car. Because large new car dealerships often finance on the lot with their own in-house lender, they profit twice when they sell you a car. In other words, new cars may be easier to finance after bankruptcy than used cars.
Maximizing Your Chances
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Car financing companies look at several variables besides your bankruptcy. Your overall credit score, payment history since bankruptcy, work history and salary, history of repossessions over the last year and financial liabilities may all be taken into consideration. If you can take time to improve your credit score and the other variables prior to purchasing a car, you will get more offers of better loans.
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References
- Photo Credit car dealership 3 image by Alexey Stiop from Fotolia.com
