How to get on the road even if your credit hasn’t fully recovered.
You might think that make a major car purchase immediately after a bankruptcy filing is impossible. But while it’s true you may not be heading out the next day to get a new set of wheels, you also won’t have to wait the 7-10 years it takes for your bankruptcy penalty expire before you buy a car you need to get around.
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. But if you need a car to get to work and get things done, then you may not have time to wait around.
Fact: In general, steps you take to rebuild your credit take about 6 months before you start to see a positive impact on your score.
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 correction service is almost always a better option than trying to do DIY credit correction 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.
How much more interest would you pay on a $10,000 5-year auto loan at 10% APR than you would at 9% APR?
a) Less than $100 more
b) Between $200-$250 more
c) Between $250-$300 more
d) More than $500 more
The interest paid at 9% would be $2,455.01 over the life of the loan, versus $2748.23 at 10% APR. Your payments are also about $5 higher every month at 10%.
c) Between $250-$300 more
Getting the right 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 will be for mortgages). 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:
- 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.
- 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.
- 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.
More 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 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.