How to Buy a Car After Bankruptcy
by Richard Fonfrias,
J.D. Chicago’s Financial Rescue &
Fonfrias Law Group, LLC
Your bankruptcy doesn’t mean you’ll be traveling everywhere on foot. You can still buy a car – even after a bankruptcy.
People who have filed bankruptcy are good credit risks. After all, even though they were once swimming in bills, all or nearly all of those debts were wiped clean by bankruptcy. As a result, they have few bills and most families can afford a car payment.
True, the interest rates you’ll pay will be high because, according to your credit report, you’re still a credit risk. But if you think you’ll never get a loan, here’s good news: You will.<
Shop Around for an Auto Loan
You go about finding a car loan just as you would had you never filed bankruptcy. You must shop around. Different lenders have different policies about bankruptcies. You’ll never know what interest rate you’ll pay unless you check with several lenders.
Don’t Take the First Offer You Get
Shortly after your bankruptcy, you may be willing to take whatever loan they offer. But don’t. The second and third offers you get might be even better.
In a 2009 study conducted by the nonprofit Center for Responsible Lending, the agency discovered that consumers paid $25.8 billion in unneeded interest due to artificially high interest rates. And the buyers who paid high interest were more likely to get behind on their payments and eventually lose their vehicles to repossession.
Lenders Look at the Reasons for Your Bankruptcy
If you’ve had a good record of paying previous car loans – or if your money problems arose from events beyond your control – then you may be able to finance your car through a credit union.
Credit unions, unlike big banks, are usually found in the towns they serve. They know the condition of the local economy, such as whether many people lost their jobs due to a factory closure. As a result, they’re more flexible on car loans.
While many people think bankruptcy is a trick used by people who are financially irresponsible, lenders don’t look at it that way. They consider unforeseen problems, such as a divorce or high medical bills, which often force people into bankruptcy.
What’s more, the situation has been made worse by the recession in 2008-2009 when unemployment reached 10 percent. But even when employment improved, many people took jobs that paid them far less than their qualifications would support.
According to the American Bankruptcy Institute, since the recession began in December 2007, over 7,000,000 consumers filed for bankruptcy. 70 percent of those consumers chose Chapter 7 (liquidation) , which erased their debts in months. But credit bureaus can keep a bankruptcy on your record for up to 10 years.
Most of the remaining 30 percent chose Chapter 13 (repayment plan) so they could save their assets. They repaid all or part of their debts in three to five years. But even then the bankruptcy could remain on their credit report for up to seven years.
Since Chapter 13 cases can take up to five years, bankruptcy trustees realize that you might need a new car during that time period. In situations like this, it isn’t hard to get new debt, especially for a car, which people often need to get to work.
Your Car Choice Must Be Reasonable
Your bankruptcy trustee isn’t likely to sign off on a loan for a new Cadillac or Mercedes. Instead, he is more likely to approve a used car up to a certain price with an interest rate cap of maybe 14 or 18 percent. A person with really good credit would pay a far lower interest rate.
The longer since your bankruptcy discharge – and the better you have managed your finances since your bankruptcy – the more likely you are to get a lower interest rate on your car loan. In fact, since a car loan uses the car as security, getting a car loan is a good way to rebuild your credit.
Your History with Car and Mortgage Payments
When you apply for a car loan, lenders look closely at your history of making car and mortgage payments, giving the most weight to the payment history on your current vehicle. With the mortgage crisis of the past few years, lenders don’t focus so much on your mortgage payment history.
Instead, they look to see whether you’ve missed any car loan payments and whether you are now caught up. Also, they look to see if an event beyond your control has contributed to your financial problems, such as a job layoff.
Then they look at your monthly income and expenses. If the monthly payment on your new loan could be difficult, they’ll ask you to pay more money down, which will lower your monthly payment and reduce the risk of repossession.
If you’re currently a member of a credit union – and if you have a good history of making payments – your credit union will probably OK your car loan.
Avoid “Buy-Here-Pay-Here” Dealers
Since many consumers think they can’t get a car loan, they often go to dealers who advertise “buy-here-pay-here”. In this situation, you make your payments directly to the dealer and not to the bank. These dealers usually use high-pressure tactics and market specifically to people with credit problems.
In fact, these dealers often offer cars with no credit check and no money down. Buyers are often thrilled, only to learn that they ‘re paying very high interest – on a long-term loan – for an older vehicle – with over 100,000 miles on it. Often, these cars break down while the buyer is still paying on the loan. Dealers are known to buy these vehicles at auction and sell them for two or three times what they paid for them.
Then the down payment is usually huge, often 25 percent or more of the purchase price. Some dealers collect more money from the down payment than they paid for the car.
The interest rates charged by these dealers are usually at the high end of the legal limit in the state where they operate. And many times these dealers won’t even quote a price for the car until they have reviewed your credit report. Often, 25 percent of these vehicles are repossessed. And then the dealer sells it all over again.
So stay away from “buy-here-pay-here” dealers.