How to Buy a Car After Bankruptcy

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You might think that making a major car purchase immediately after a bankruptcy filing is impossible. While it’s true you may not head out the next day to get a new set of wheels, you also don’t need to wait the 7-10 years. Although bankruptcy will still show up on your credit that long, the “weight” of the penalty decreases over time. What’s more, you can offset the damage of that penalty by taking certain actions now. So, buying a car after bankruptcy is possible, even within six months of your final discharge date.

Once your bankruptcy is complete, you’ll want to take steps to rebuild your credit before you start making major purchases. In an ideal world, you can recover to a good credit score before you start taking out big loans like a new auto loan or a mortgage. However, if you need a car to get to work and get things done, then you may not have time to wait around.

So here is what you can do to get on the road quickly…

Before you buy

First, you need to take steps to bump up your credit score as much as possible before you apply for your new loan. If you don’t have time to wait so you can take some steps to boost your score, then you at least need to make sure mistakes on your credit report aren’t making your credit score even worse than it needs to be.

So at a bare minimum, takes steps to repair your credit. If you have the means, a credit repair service is almost always a better option than trying to do DIY credit repair on your own. You save time and are more like to be successful than if you try to do it on your own.

This helps you to maximize your credit score as much as possible before you apply for a loan. Remember, better credit not only means that it’s easier to get approved. You also get a better interest rate, which means less interest paid over the life of your loan.

Getting the right auto loan for your finances

Directly after your bankruptcy, most lenders won’t even consider lending to you for something as big as an auto loan (although they’re more flexible on auto loans than they would be for a mortgage). But just because lenders are wary of you, it doesn’t mean that you can’t get financing anywhere. You just have to look into options that are specifically tailored to people in your situation.

Here are some of the places you’ll want to look first:

1. Your own bank or credit union. If you are a standing customer at a bank or (even better) a credit union, then you may be able to get financing options directly from your main financial institution. They may be more willing to work with you, because all of your accounts are with them.
2. Bad credit auto lenders. Look into auto lending companies that specialize in working with customers who have bad credit. These companies aren’t scams – they just are willing to take more of a risk and may charge you more to borrow. But even a “bad credit auto loan” can be a good deal as long as it works for your budget. Make sure when you’re searching online that you’re looking specifically at auto lenders.
3. Swap leasing. This is basically where you take on someone else’s lease and take over the payments from them. You only have to pay what’s left on the auto and they get out of a loan that isn’t working for them for whatever reason. Just make sure to read all terms carefully and have the vehicle checked out prior to the exchange to ensure you’re not getting stuck with a lemon.

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Tips for getting the best terms possible

The last thing you want to do when you just get out of bankruptcy is to take out a loan that’s bad for the budget. Putting your finances into a tailspin just to get a car is a recipe for disaster. So, you need to take as many steps as you can to get the best terms possible.

These tips can help you get better terms on your loan, for lower monthly payments and less interest paid over the life of your loan.

• Make a bigger down payment. This decreases the size of the loan you have to take out so you can enjoy better terms on your loan with lower monthly payments.
• Find a cosigner with excellent credit. Their awesome credit will offset you awful credit, so you can qualify for a better loan at a lower interest rate.
• Watch out for hidden fees & add-ons. These elusive and expensive extras are even more common on loans for people with bad credit. If you have to apply for a bad credit auto loan, make sure the lender isn’t trying to bump up their profits with a lot of add-ons you don’t need.
• Avoid anything that’s “contingent,” “adjustable,” or “conditional.” Loans that have fixed payments over their entire life are extremely easy to manage. But any variable that can change your payment schedule down the road is a big risk. Only get a loan that’s going to stay at the current terms until you pay it off.
• Don’t buy more car than you can afford. If you’re extending the term of your loan anywhere beyond 5 years because you can’t afford the payments otherwise, then you’re probably buying more car than you can afford on your current budget. Downsize or scale back until you can increase your income or improve your financial situation more.

 More Questions about Buying a Car After Bankruptcy

A question from a reader for a Debt.com expert

Question: In 2009, I filed for bankruptcy. Currently, I have several open credit cards that I pay on time. If I consolidate my credit card debt, would it affect me in the process of purchasing a car?

— Lorena in France

Howard Dvorkin CPA answers…

In the three short sentences you wrote, Lorena, there’s a lot to deconstruct. So let’s dive right in…

There are several kinds of bankruptcy, and each has different rules and consequences. For instance, Chapter 7 bankruptcy, often called “straight bankruptcy,” eliminates unsecured debt when you give up your assets. That kind of bankruptcy stays on your credit report for 10 years.

Meanwhile, a Chapter 13 bankruptcy (which involves a repayment plan) stays on your credit report for only seven years.

Why is this important? Well, if you’re trying to buy a car, and your Chapter 7 bankruptcy was in 2009, it’s still on your credit report — and lenders will see it. However, if you filed for Chapter 13, it’s now eight years later and has disappeared from view.

This is crucial because lenders “pull” your credit report before giving you money. If you’re buying a car and seeking an auto loan, a bankruptcy will make the terms of that loan more expensive for you.

OK, so that’s how bankruptcy can affect your impending car purchase. The second half of your question is about credit card consolidation. Here again, there are several possibilities. In other words, when you talk about “consolidating my credit card debt,” that topic has several possible tactics within it.

For example, you can get what’s called a “personal debt consolidation loan.” You do this through a bank or credit union or an online lender. Yes, you’re taking out a loan, but the interest rates will be significantly lower than what you’re paying on your credit cards. You use this new loan to pay off the credit cards, then you pay back the consolidation loan.

Of course, the only way to get a low interest rate is to have a high credit score. If you declared bankruptcy in 2009 and it’s still on your credit report, this option isn’t likely to work.

A better option in your case, Lorena, might be a debt management program. Known by the initials DMP, these programs are available through nonprofit credit counseling agencies.

The advantage to a DMP is that it’s set up in conjunction with a credit counselor who reviews all your debt-relief options. If a DMP is right for you, your total monthly payments can be reduced by 30 to 50 percent.

While it can take 36 to 60 payments to pay off the debt, you can actually build good credit during the process — which makes buying a car a little cheaper.

While you didn’t ask, let me suggest another course of action for you, Lorena: Buy a cheap used car you can afford with cash on hand. Sure, it won’t be a vehicle that impresses your friends. It will, quite frankly, be old and ugly. However, it’s only temporary, and if it last long enough for you to get clear of your bankruptcy and a good distance into a DMP, you’ll be able to reward yourself with a nicer vehicle in just a little while.

Consider it, Lorena.

contributor

Howard DvorkinAuthor

CPA - Debt.com Chairman & Personal Finance Expert