Securing Auto Financing Post-Bankruptcy: A Comprehensive Guide
Filing for bankruptcy, while a tough decision, can offer individuals a fresh start, offering an escape from the clutches of overwhelming debt. However, it does leave a lasting imprint on one’s credit history for at least six years (for first-time bankruptcy). This situation makes it challenging to rebuild credit and secure new loans or credit after bankruptcy, including car loans. Despite these hurdles, the necessity for a vehicle for transportation, especially for work, remains constant. This guide aims to help you navigate the path of securing car loans after bankruptcy.
Is Auto Financing Possible Post-Bankruptcy?
Surprisingly, the answer is affirmative. You can secure car loans after bankruptcy even before the six-year period lapses and the bankruptcy record is wiped off your credit report. During this wait period, you can take affirmative steps to rebuild your credit. Regular and timely repayment of loans, especially big-ticket ones like car loans, can significantly improve your credit score.
How to Secure a Car Loan Post-Bankruptcy
To obtain a car loan post-bankruptcy, you’ll need to offer some form of collateral. However, after your bankruptcy record is removed from your credit report, you might be able to procure a car loan, depending on your financial situation and credit rebuilding efforts.
Where Can You Secure a Car Loan Post-Bankruptcy?
Alternative lenders can help you secure car loans after bankruptcy. However, due to the bankruptcy record and damaged credit score, premium loan terms may be elusive. Alternative lenders typically charge higher interest rates, which translates into larger payment amounts. But if you manage your payments well, a car loan can not only get you a vehicle but also help improve your credit.
Pros and Cons of Car Loans Post-Bankruptcy
Understanding the pros and cons of car loans after bankruptcy can help you make an informed decision.
Pros
- Credit Score Improvement: The best way to repair a damaged credit score post-bankruptcy is to gain access to credit and use it responsibly. Regular and full payments of your car loan can help you rebuild your credit score.
- Manageable Payments: While alternative lenders typically charge higher interest rates than traditional banks, they offer extended loan terms, which can help lower the regular payments.
- Ownership of Vehicle: One significant advantage of car loans is that you own the vehicle after the loan is paid off. This asset, coupled with your improved credit score, can help you achieve your next financial goal.
Cons
- Higher Interest and Fees: Car loans after bankruptcy, available through alternative lenders, typically come with higher interest rates and considerable fees. This is because these lenders need to balance the risk of lending to individuals with a bankruptcy record. While you can negotiate a manageable payment schedule, you will end up paying more for the vehicle in the long run.
- Increased Debt Levels: While responsible repayment is crucial to improving your credit, a high debt-to-income ratio can limit your access to other loans and financial services. A car loan naturally increases your debt, and you must carefully assess your readiness for this commitment.
- Investment in a Depreciating Asset: While a vehicle is technically an asset, cars are infamous for depreciating rapidly. This is a factor to consider regardless of the type of car loan you secure. If you plan to use the vehicle to secure a different loan in the future, consider the expected value of the vehicle at that point. It may be prudent to purchase a pre-owned, cheaper vehicle given the rapid depreciation of this type of asset.
How To Enhance Your Chances of Securing a Car Loan Post-Bankruptcy?
While seeking a car loan with post-bankruptcy credit can be stressful, the following steps can boost your chances:
Boost Your Credit Score
Improving your credit score before applying for a car loan can be beneficial. One effective method is to secure a credit card. With secured cards, you place a deposit that serves as collateral against the credit account, making it accessible even to those with poor credit.
Save for a Down Payment
A higher downpayment can lead to better loan terms as it reduces the lender’s risk.
Reduce Your Debt
Lowering your debt makes you a less risky borrower, so try to reduce your debt as much as possible. A lower debt-to-income ratio makes you a more attractive borrower.
Compare Rates
Ensure that you’re getting the best possible rate by thoroughly researching and comparing rates. Consider using a loan comparison platform for specific quotes on car loans.
Find the Right Lender
Look for lenders specializing in applicants with bankruptcy records or bad credit. Use the loan comparison site to identify alternative lenders who offer reasonable terms.
Avoid Falling Back Into Debt
The final step is crucial. Ensure you take measures to avoid falling back into debt. Unfortunately, there are predatory lenders who take advantage of vulnerable borrowers. To mitigate this risk, thorough research is essential.
Wait to finance until you have rebuilt your credit. Use available mechanisms, such as secured cards, and pay down your debt before taking on more. Also, budget for the real cost of the car, including maintenance, insurance, registration, and fuel. Having a realistic budget helps you know what to expect in terms of actual cost.
Construct a detailed budget that takes into account your income and expenses. Factor in the projected expense of the vehicle and determine whether taking a loan is the right decision. You can improve your situation by improving your credit (to get a better interest rate) or by adjusting the price range of the car you are seeking to pursue a lower loan amount.
How To Avoid Losing Your Car In Bankruptcy?
There are ways to avoid car repossession during bankruptcy. For instance, if your car is valued at $8,000 and you live in Ontario, which allows a maximum of $7,117, you can pay the $883 difference to your trustee. This amount is added to the fund pool distributed among your creditors, allowing you to keep your car.
However, if you are unable or unwilling to pay this difference, you’ll need to surrender your car to your trustee. The car is then sold, and the sale proceeds are distributed among your creditors.
If the car sells for less than your outstanding car loan balance, you’ll owe the remaining balance. But this balance, being unsecured debt, can be included in your bankruptcy if it occurred before declaring bankruptcy.
If You Have An Outstanding Balance On Your Car Loan
If you still have an outstanding balance on your car loan, whether you can keep the car depends on whether the outstanding debt is classified as secured or unsecured. Bankruptcy in Canada deals with unsecured debts. So, if the car serves as security for a loan, it is exempt from bankruptcy.
However, if the lender has a lien on the title and has a claim against the car, they may be able to seize it if they can prove their rights to it. If they’re successful, your trustee will release the vehicle to the creditor.
If you owe much more than the market value of the car or you can’t afford to continue making payments, you can surrender the car and the shortfall debt will be included in the bankruptcy.
What If Your Car Is Leased?
If you have a leased vehicle in bankruptcy, there’s a chance you can keep the car, as long as you continue to make lease payments. Alternatively, you may include the lease debt in your bankruptcy and surrender the car to your trustee.
Final Thoughts
Securing car loans after bankruptcy requires careful research and execution. Balance the benefits of owning a vehicle with the risk of increasing your debt. By taking your time, learning about your options, and preparing thoroughly, you can find loan terms that are beneficial for you both now and in the future.
