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Updated on Monday, February 4, 2019
You may need a car to get you to and from work, school or other important places. But if you’ve gone through bankruptcy, you may be wondering whether getting a car loan is possible. While it does come with some challenges, a car loan post-bankruptcy can happen. Here’s what you need to know.
Getting a car loan after Chapter 7 or Chapter 13 bankruptcy
How long do I have to wait after Chapter 7 to buy a car?
Also known as liquidation bankruptcy, Chapter 7 bankruptcy involves selling the debtor’s assets to pay off creditors so they can receive a fresh start.
“While you can purchase a car during Chapter 7 bankruptcy, it is in your best interest to wait until after as most lenders will be hesitant to approve you and offer you affordable rates while you’re still in bankruptcy,” said Angela Moore, a certified financial planner at Modern Money Advisor in Miami who worked as a finance manager in the car business for six years.
Your bankruptcy will be discharged about 60 days after your 341 meeting (meeting of creditors). At that time, you may begin to apply for a car loan.
How long do I have to wait after Chapter 13 to buy a car?
Chapter 13 bankruptcy allows the debtor to set up a repayment plan so that they can pay their creditors in a three- to five-year period.
“Although you can purchase a car during the repayment plan, it is wise to wait until this period has come to an end as it’ll be easier to get approved for a loan and land more favorable terms,” Moore said.
You can receive a discharge for the rest of your unsecured debts once you’ve completed your repayment plan and can then apply for a car loan. Discharge for Chapter 13 bankruptcy typically occurs about four years after the filing date.
7 ways to improve your odds of loan approval
Fortunately, there are a variety of tips that may increase your chances of getting approved for a car loan after bankruptcy.
1. Rebuild your credit
It’s a good idea to rebuild your credit before applying for a car loan after bankruptcy.
Paying your bills and credit cards on time and keeping balances low can save you a significant amount of money, said Moore.
2. Save for a down payment
Saving for a down payment may be well worth the time and effort, as it can improve your chances of securing a better interest rate and lower monthly payments.
According to Moore, there are times when you can’t get a car loan unless you put down at least $1,000 to $2,500.
Down payment requirements will depend on your income and the type of car you want, she said.
3. Do your homework
“Car dealerships are on a mission to make as much money as possible,” Moore said.
Moore recommends going to a few credit unions and applying for car loans to see what types of interest rates you can get. Then, she said, you can use these as a negotiating tool at the dealerships.
4. Consider a cosigner
Try to find a cosigner who has good credit since they can help you qualify for a better loan.
“Be strategic about who you choose to cosign your car loan,” Moore said. “This person should have excellent rather than subpar credit and trust that you’ll make your payments on time and don’t ruin their credit.”
5. Use a brokerage service
Using a brokerage service, like National Automotive Brokerage Services, can ease the stress of the post-bankruptcy car-buying process.
Brokerage services have access to auto auctions and other resources that allow them to get cars at or below retail prices. They also often partner with mechanics that can perform inspections and check the conditions of the cars they find.
“Brokerage services can save you the hassle of going to dealership after dealership for hours and make your life a lot easier,” Moore said.
Once you’ve been making car payments, you may want to look into auto refinancing to get a better interest rate.
It could save you money and reduce the years on your loan, Moore said.
7. Buy what you can afford
While it may be tempting to purchase the newest luxury SUV, doing so may do more harm than good. You don’t want to get yourself in the same situation you were in before, so it’s a good idea to create a budget and look closely at your income and expenses.
“Your living expenses should be 28% or less of your gross income, and all of your debt combined should be no more than 33%,” Moore said. “Use this information to determine what kind of car you can afford before you step foot [in] any dealership.”
The bottom line for getting a car loan after bankruptcy
By following the tips above, you may be able to land a car loan with decent, or even good, terms after bankruptcy. While you’re going through the process of getting a car loan, we encourage you to shop around and compare auto loans.