The time it takes to get a car loan after bankruptcy can depend on whether you filed for Chapter 7 or Chapter 13 bankruptcy. It’s also necessary to shop around to find lenders who work with borrowers after bankruptcy.
You can get a car loan after bankruptcy, but it may be a little more challenging to qualify for auto financing. There are lenders who will approve you for a car loan post-bankruptcy, though you might pay a higher interest rate to borrow. Lenders may also tack on a steep origination fee to underwrite the loan. Learn more about how long after bankruptcy it may take for you to get a car loan.
- How long you have to wait to get a car loan after bankruptcy can depend on whether you filed for Chapter 7 or Chapter 13 bankruptcy protection.
- It’s possible to get a loan after filing bankruptcy, though you may find it much more difficult to qualify and interest rates will likely be higher.
- When comparing lenders that offer auto financing for bankruptcy filers, it’s important to consider the interest rate, fees and loan terms.
- Getting co-signer on a car loan after bankruptcy could make it easier to qualify and potentially help you get a lower interest rate.
How Long Do You Have to Wait to Get a Car Loan After Bankruptcy?
How quickly you’re able to get a car loan after bankruptcy can depend in part on which type of bankruptcy you filed. You can file for bankruptcy protection under Chapter 7 or Chapter 13 of the federal bankruptcy code.
Chapter 7 bankruptcy is also known as liquidation bankruptcy, as debtors are usually required to liquidate some of their assets as a condition of clearing their debts. In this type of bankruptcy filing, you ask the court to erase your debts. In exchange, the court can take some of your assets, liquidate them and use them to pay your creditors.
A Chapter 7 filing may be appropriate in situations where you have largely unsecured debts, such as credit cards or medical bills, and you don’t have sufficient assets to pay them off. The process for filing and completing a Chapter 7 bankruptcy can take anywhere from one to six months. Once your case is discharged, you would no longer be responsible for paying any of the debts included in your filing.
Chapter 13 bankruptcy gives you an opportunity to repay debts over time while retaining all of your assets. This type of filing is designed to help you repay your creditors over a period of three to five years, without having to go through liquidation.
You might choose a Chapter 13 bankruptcy if you have assets you want to keep, such as a home, vehicles or bank accounts, and you have the means to pay something toward your debts. If you own a business, you might file for Chapter 11 bankruptcy instead to create a plan for repaying what you owe.
A Chapter 7 bankruptcy can remain on your credit report for up to 10 years. Chapter 13 bankruptcy, meanwhile, can stay on your credit for up to seven years. That doesn’t mean you’ll need to wait seven to 10 years to get a car loan. However, you can expect there to be an immediate impact on your credit scores when filing for bankruptcy.
If you miss payments on a Chapter 13 plan, the bankruptcy court may switch you to a Chapter 7 filing or dismiss your petition altogether.
How Bankruptcy Affects Your Car Loan Eligibility
When you apply for a car loan, lenders can check your credit reports and credit scores. A credit score is a three-digit number that lenders use to measure risk. The higher your score, the less risk you appear to lenders. Bankruptcy can be extremely damaging to your credit and it’s possible that your score might drop 100 points or more, depending on where it was before your filing.
Lenders may view borrowers with a previous bankruptcy as higher risk. In terms of how that affects your car loan eligibility, any of the following may be true:
- Lenders may be reluctant to approve you for a car loan, especially if you’re only a few months out of bankruptcy.
- If approved, the lender may charge a higher interest rate for the loan to offset the perceived risk of lending to you post-bankruptcy.
- You may be charged a higher origination fee to have the lender underwrite the loan, which again, is a risk management measure.
It’s not impossible to get a car loan after bankruptcy, but you should be prepared to have your credit history come under closer scrutiny from lenders.
Using a car loan calculator can help you to estimate what you might pay monthly and overall using different interest rates.
How to Get a Car Loan After Bankruptcy
Bankruptcy takes many years to fall off your credit reports. However, if you’d like to get a car loan after bankruptcy, there are some steps you can take to increase your odds of being approved.
Step 1: Check Your Credit
Before applying for a car loan, you should understand what lenders will see on your credit reports and what they will factor into their lending decisions. Checking your credit reports and scores can give you an idea of how risky you’re likely to appear.
Here are some of the things to look for when checking your credit.
- Bankruptcy reporting: If your bankruptcy case has been discharged, it’s important to ensure that any debts included in your filing are being reported as closed accounts with a zero balance.
- Errors: It’s also a good idea to look for errors on your credit reports that may be hurting your score. That includes improper reporting of debts included in the bankruptcy, as well as errors related to debts that were not.
- Negative information: Negative information, such as late payments or high credit utilization, can hurt your score. While you can’t dispute negative information that’s accurate, you can identify and stop negative habits that may be dragging your score down.
You are entitled to a free credit report each year from each of the three major credit bureaus. You can access that report at AnnualCreditReport.com. You have the right to dispute errors on your credit reports. To dispute errors, you’ll need to file a written request with the credit bureau that’s reporting the information.
Step 2: Start Rebuilding Credit
Rebuilding credit after bankruptcy can take time, and the sooner you get started, the better. Some of the best ways to rebuild credit after bankruptcy include:
- Paying bills on time, especially any debts that were not included in the bankruptcy.
- Getting added as an authorized user to another person’s credit card account, which can reflect their good credit habits onto your credit report.
- Applying for a secured credit card, charging small amounts to it each month and paying the balance in full.
- Getting a credit builder loan through your bank or credit union to re-establish a positive payment history.
Step 3: Save a Down Payment
The more you put down on a new or used car, the less you have to finance. Saving a larger down payment could make it easier to qualify if you don’t need a larger loan.
If you’re planning to save money for a down payment on a vehicle, remember to keep it in the right place. A high-yield savings account, for example, can be a safe and secure way to grow your money if you’re earning a higher interest rate.
Step 4: Compare Lenders and Shop Around
If you’re working on rebuilding credit and you’ve got a down payment saved, the next step is finding the right lender to work with. It’s a good idea to shop around and compare car loans from multiple lenders to get a sense of what you might qualify for and how much you’ll pay.
There are a few options for getting a car loan after bankruptcy.
- Credit unions: A credit union may be more willing to work with borrowers post-bankruptcy compared to a bank. You’ll need to meet membership requirements to join a credit union but it may be possible to find car loan options with rates that aren’t astronomical.
- Online lenders: Online lenders can offer bad credit car loans for people who have been through bankruptcy or have lower credit scores due to foreclosure. Some online lenders may give more weight to factors other than credit scores for approval, such as your income and employment history.
- In-house financing: Car dealerships can offer in-house financing for borrowers with bad credit, including people who have been through bankruptcy. These are usually subprime loans, meaning they have higher interest rates, but you might consider buy here, pay here financing if you’re not able to qualify for a car loan elsewhere.
Considerations When Applying for a Car Loan After Bankruptcy
Getting a car loan after bankruptcy is a little different than applying for financing when you have good or excellent credit. Here are a few things to keep in mind as you compare your borrowing options.
You’re more likely to pay higher interest rates for a car loan following bankruptcy. Again, that’s because lenders are likely to see you as being a higher risk. The higher the rate on your loan, the more you’ll pay total interest and the higher your monthly payments will likely be.
Asking someone to co-sign a car loan for you after bankruptcy could make it easier to get approved. It could also save you money if you’re able to qualify for a lower interest rate. Keep in mind, however, that a cosigned loan can show up on both of your credit reports. If you default on the loan payments, you run the risk of harming your cosigner’s credit and your relationship with them.
When you emerge from bankruptcy, you are in a vulnerable financial position. Some less reputable lenders try to take advantage of that. For example, a lender may offer car loans with no credit check, but the fine print outlines terms for exorbitant interest rates and/or fees.
That’s why it’s important to thoroughly research lenders before applying for a car loan after bankruptcy. It can also be helpful to read online reviews from customers and check out their Better Business Bureau (BBB) ratings to learn about their reputation.
Can You Buy a Car During Active Bankruptcy?
It’s difficult but possible to buy a car while you’re in the middle of Chapter 7 or Chapter 13 bankruptcy if you’re able to find a lender who will work with you. However, if you buy a car during bankruptcy and then can’t afford it, you won’t be able to add that new debt to a bankruptcy case that’s already in progress.
How Long Does Bankruptcy Stay on My Credit Report?
A Chapter 7 bankruptcy can stay on your credit report for up to 10 years, while a Chapter 13 filing can stay on your credit for up to seven years. That time begins for Chapter 7 bankruptcy cases when they’re filed and for Chapter 13 cases when they’re completed.
What Is the Average Credit Score After Bankrutpcy?
There’s no set average credit score you can expect to have after bankruptcy, but it will most likely be significantly lower. What your score is when you emerge from bankruptcy will largely depend on what it was when you started the process. The higher your score was before filing, the bigger the decrease you can expect to see.
How Long Does It Take to Build Credit After Chapter 7?
How long it takes to rebuild credit after Chapter 7 bankruptcy can depend on how much your score dropped and what you’re doing to improve it. If you’re consistently paying bills on time and building positive credit history such as through using a secured credit card responsibly, then you may see your credit score start to improve in as little as six months.
The Bottom Line
Getting a car loan after bankruptcy can help you rebuild credit if you’re making payments on time. However, it’s important to know what you can expect when it comes to qualifying for a loan and how much you’ll pay. Taking steps to improve your credit after coming out of bankruptcy can help you get back on track financially so that you can qualify for the best car loan rates sooner.