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- Bankruptcy is a legal proceeding that leads to discharge or reorganization of debts.
- A bankruptcy filing can damage your credit score and stay on your credit report for up to 10 years.
- Getting a car loan after bankruptcy is possible, but it won’t be cheap.
Bankruptcy can offer lasting financial relief to people struggling to repay their debts, but it comes at a cost.
A bankruptcy filing can stay on your credit report for up to 10 years, flagging you as a risk to lenders. This can make it harder to get approved for new, affordable loans until you rebuild your credit.
Here’s how bankruptcy can affect your chance of getting a car loan.
Can you get a car loan during or after bankruptcy?
Bankruptcy puts a negative stamp on your credit report and lowers your credit score, but it can’t stop you from borrowing money in the future.
According to Experian’s analysis of auto loans in the third quarter of 2022, roughly 5% of new car loans are made to subprime borrowers (credit scores between 501 and 600) or deep subprime borrowers (credit scores between 300 and 500).
If you are approved for a car loan during or shortly after bankruptcy proceedings, it likely won’t be affordable.
Filing for bankruptcy is a signal you’ve had difficulty managing debts, says Lyle Solomon, principal attorney at Oak View Law Group, which specializes in debt management and bankruptcy. As a result, “lenders may consider you a higher risk borrower and may be more hesitant to lend to you,” he says.
Expect high interest rates and other unfavorable loan terms, Solomon adds, such as a large down payment or requirements to add a cosigner or put up collateral.
According to Experian’s report, interest rates on loans for used cars were five times higher, on average, for borrowers with the lowest credit scores than for borrowers with the highest credit scores. Subprime borrowers had an average interest rate of 15.86% for used car loans, while deep subprime borrowers had an average interest rate of 19.81%.
Tips to qualify for a car loan after bankruptcy
Although experts advise avoiding new debt for a while after bankruptcy, you may need a car. The good news is that taking on a new car loan responsibly may actually help you rebuild your credit.
While some lenders will turn away subprime borrowers, you should be able to find a reputable lender who’s willing to work with you, Solomon says.
Here are a few things to remember if you’re seeking a car loan after bankruptcy.
1. Check your credit
The type of bankruptcy you file for and the credit score you start with will determine how severely bankruptcy will impact your credit score. People with poor credit may actually experience a boost as bankruptcy lowers their debt-to-income ratio and offers a fresh start.
Download your credit report at no cost from each of the three major credit bureaus on annualcreditreport.com. Check to make sure that everything is accurate. If you had debts discharged during bankruptcy, it should be reflected on your credit report.
2. Pay bills on time
Most borrowers will have to slowly rebuild their credit by paying bills on time, keeping credit card balances low, and avoiding new credit or loans unless necessary, Solomon says.
While a bankruptcy filing will stay on your credit report for seven to 10 years, positive habits will improve your credit score over time, making it easier to get an affordable loan.
3. Have a down payment
Some banks and credit unions are more likely to lend to borrowers with a history of bankruptcy if they can provide a large down payment, Solomon says.
A good rule of thumb is to put down 10% to 20% of the car’s purchase price in cash, but the more you can pay, the better. Not only could a lender be more likely to approve you for a loan, but your monthly payments will be lower since the loan amount is smaller, and you may even qualify for a lower interest rate.
4. Consider a cosigner
Think about asking a trusted family member or friend with better credit to cosign the loan. They should be aware of your history and be prepared to pay your bills if you fall behind, or they risk damaging their own credit.
A cosigner “can help improve your chances of getting approved and may result in more favorable loan terms,” Solomon says.
5. Watch out for predatory lenders
If you see lenders promising “no credit check” loans or “bad credit” loans, do your due diligence.
“Check their reviews and ratings online, and look for any red flags that suggest they may be a predatory lender, such as high fees or interest rates,” Solomon says. They may also use confusing or complex language or hide the loan terms in the fine print.
Takeaways about getting a car loan after bankruptcy
Bankruptcy won’t preclude you from ever getting a car loan. If you get approved for a new loan and haven’t had time to meaningfully repair your credit since bankruptcy, expect higher interest rates and more stringent lending requirements.
Making a bigger down payment or adding a cosigner, in addition to shopping around for the best offers from reputable lenders, can help make borrowing more affordable.