Tips when Getting a Car Loan after Bankruptcy
Getting a car loan after emerging from a bankruptcy filing can be a good strategy to rebuild your credit.
Bankruptcy is not a death sentence and it should not be considered as one. While many Americans find filing bankruptcy inevitable, nobody should ever lose hope after emerging from this financial process. The latest U.S. consumer bankruptcy data suggests that it is still possible to bounce back from bankruptcy.
Based on latest available statistics (June 2017) from Statista, the states with the highest rates of personal bankruptcy are Alabama, Tennessee, Georgia, Illinois, and Mississippi. In most other states, the number of such cases remains high.
Wherever you are, maintaining your financial discipline is critical to keeping good personal finances. If things start to fall apart along the way and filing for bankruptcy becomes unavoidable, then there are creative ways to rebuild your personal finance and your credit status at the same time in the wake of a bankruptcy filing.
Believe it or not, getting a car loan to buy a new or used car can be a good strategy to rebuild your credit. The goal would have to be to prove that you can already take on new financial responsibilities and pay your dues on time—and you must do that no matter what happens.
“Getting a car loan to buy a new or used car can be a good strategy to rebuild your credit.”
However, you should understand that because of your bankruptcy record and your tarnished credit history, you can possibly qualify only on car loans that come with much higher interest rates. There is no way you could obtain an auto loan that is attractive as one that a person with high credit scores can obtain.
Here are some tips you can observe when applying for and obtaining a car loan after a bankruptcy filing:
There are two ways you must shop around when buying a new or used car. First, you should find a dealership offering the best deal for the vehicle you have been looking at. Second, you must spend even more time looking for a car loan provider that will offer you the best rate.
It is always ideal to be pre-approved for a car loan before going to the dealership for the purchase. This provides you with more time to pick the best available option and facilitates a hassle-free transaction. Although a pre-approval is advantageous, the process does incur negative scores which will be applied against your current credit score.
In this case, getting a pre-qualification is a far better option. It allows you to get the closest estimate to how much a car loan could actually cost you. Moreover, you can get as many pre-qualifications as you want for various car loans without any consequences if you do it in a shorter period of time such as a month as it will be seen as only one application versus multiple hits on your credit score.
“Although a pre-approval is advantageous, the process incurs negative scores applied against your credit score.”
Pay a substantial amount for down payment
It will be a challenge to make yourself seem appealing as a potential borrower to any lender. Luckily, it becomes easier if you have no record of car repossession in the past and a clean driving record with it. Additionally, you can further boost your appeal by paying a substantial down payment in cash.
A substantial down payment can cover the depreciation of the car. Therefore, in case you default on that auto loan, the car’s value would be covered in any outstanding loan balance, significantly lowering the risk that the lender is taking.
A standard down payment amounts to about 20% of the car purchase price. Some lenders offer flexibility if you prefer to pay lower or higher than that amount. Paying out a higher down payment will not just impress lenders, but also lower your overall costs as the principal of the loan is smaller, greatly reducing how much you’ll spend on it over the entire term.
Convince someone to be a loan guarantor
A relative or close friend may agree to be a co-signer for a car loan especially post-bankruptcy. However, this strategy may be more difficult than it seems.
First, it will be a challenge to convince someone with a good credit score to take such a risk. Second, it would put more pressure on you as the possibility of defaulting on the loan means the same possibility of seriously damaging your co-signer’s finances and potentially your relationship.