Buying a Car After Bankruptcy – What You Should Know
Buying a car after bankruptcy
Contrary to what many people seem to think, filing for bankruptcy doesn’t mean you can’t buy a car.
It probably won’t be a Mercedes or Lexus, however.
In fact, most people who are recovering from a bankruptcy are willing to take just about anything they can qualify for. While this might be tempting, you should definitely shop around, as interest rates can vary widely and, in the case of buying a car after bankruptcy, will already be much higher than traditional rates.
Avoid Big Banks
For financing, your local credit union might be your best bet. While many view bankruptcy as a tactic used by people who are financially irresponsible, sometimes bad things happen to good people, such as a divorce or large medical bills.
Local credit unions typically understand this, and are willing to help you buy a car after bankruptcy more than a megabank whose focus is strictly the bottom line: “How much can we profit from this loan?”
Chapter 7 or Chapter 13?
Most people who file for bankruptcy choose to go the Chapter 7 route, which means their debt is erased in just a few months, even though it may stay on their records for 10 years.
Some, however, opt for Chapter 13 because they want to hold on to what they’ve got. These individuals typically pay all or a large portion of their debts, and the process takes about five years. Chapter 13 stays on their records for about 7 years.
Because Chapter 13 can take so long, most people will end up needing a new car at some point during the process.
Bankruptcy trustees, those who oversee bankruptcy cases understand this, and are typically willing to help the person buy a car after bankruptcy, within reason.
The trustee will set the maximum price you can spend for a car – typically a used vehicle between $15,000 and $20,000. The interest rate will also be capped at 15 to 18 percent, which is much higher than a person with excellent credit would pay.
For example, if you have a FICO credit score of 740, your APR would be about 3.80 % for a 36-month car loan. If, on the other hand, your score is 540, your APR would be closer to 17.0 % for the same term.
Time and good behavior are certainly factors that play in your favor post-bankruptcy. If you can prove to lenders over time that you’re taking the appropriate steps to rebuild your financial life, you just might be able to land a more palatable interest rate.
You can also use the vehicle as collateral for the loan, which makes getting a car loan one of the best ways to rebuild your credit after the bankruptcy.
What the Bank Looks For
Lenders want to know if your past mortgage and car payments have been made on time. They do consider incidents such as job loss or divorce, which are considered uncontrollable and can negatively impact your finances in a number of ways.
Monthly income and expenditures also play a large role in the lender’s decision-making process. If the lender feels making the monthly payment will be a stretch, it may require you to put more money down. That way, if they do have to repossess it, their financial risk is minimized.
Sometimes finding a bank or credit union willing to work with you can take time and patience – factors you might find in short supply if you desperately need a car. After being turned down once or twice, some car buyers are lured down a darker, less stable road.
Enter the “Buy Here Pay Here”
Nobody likes to feel like they’re being judged. As if filing for bankruptcy doesn’t make you feel bad enough already, now you have lenders telling you why you have to keep asking your brother-in-law for a ride to work. You’re willing to do almost anything to get a car.
“Buy here, pay here” auto dealers cater to this desperate mindset. The salesman at one of these dealerships might be the first person to say “yes” to helping get you into a car. Most of the time you don’t need any money down and there is no credit check.
As their name suggests, you and the dealership make arrangements for you to pay the dealership directly. Many car sales professionals, however, advise you to stay away from these dealerships at all cost. Why?
These dealerships have been known to prey on customers who are uneducated about the whole car-buying process. Most of the time the interest rates are through the roof on extended term loans to keep the payments low. Not only that, but the vehicles are older, and many times break down while you’re still paying on the loan.
Now your brother-in-law is still driving you to work, and you’re making payments on the vehicle sitting in your driveway that won’t start.
If you’re like about 25% of the people who buy from “buy here pay here’s,” you simply stop making payments, and the vehicle gets repossessed. It is then typically patched together by the dealership’s in-house mechanics and sold to the next person who received a “no” from a reputable lender and is tired of riding to work with his brother-in-law.
If you’re coming out of bankruptcy and cannot yet qualify for a legitimate auto loan, public transportation may be your best bet. Sock all the cash away that you can, so you can make a sizeable down payment when the time is right. If you’ve been on your job for at least 3 months and can put at least $3,000 down, many reputable dealerships can get you into a solid, reliable vehicle backed by a warranty.
Bankruptcy doesn’t have to be the end of the world, even though it might feel that way at times. Many people in Chapter 13 qualify for auto loans and begin rebuilding their credit in a proven, sensible way.
I would love to answer any questions you might have. Feel free to give me a call at 615-605-5701, or just leave a comment below. Looking forward to hearing from you!