Buying a Car after Bankruptcy
The Wrong Way to Get a Car Loan After Bankruptcy
Most people, when contemplating bankruptcy, believe that they'll never be able to buy any car except an old clunker because they won't be able to get a car loan.
Indeed, many bankrupt people choose to buy used cars -- for cash --- so they won't be saddled with payments or have to pay higher insurance rates. If that's your decision, more power to you. It's a fine idea.
In my own case, despite the fact that I started getting "blank check" car loan offers only a few years out of bankruptcy, I still buy used cars for cash instead. Who needs the extra payments? And the insurance savings are tremendous: Without having to carry collission and comprehensive coverage, my insurance premiums are about $33.00 a month. (When I had a new car, I paid close to $200.00 a month for insurance.)
Besides, where I live, new cars get old fast because of the extreme weather, road salt in the winter, and so forth. So I try to find reliable, used cars, and I pay cash for them.
But also remember that getting a car loan is one of the best ways to rebuild your credit after bankruptcy. Why is that? Well, let me let you in on a little secret: Almost anyone can get a car loan. Seriously. There are even companies who specialize in bad credit car loans.
In fact, you probably will start getting pre-approved car loan offers the same day after you receive your discharge in the mail -- or possibly a few days before. Seriously. There are plenty of lenders out there who will happily finance a used car for you. So don't worry: You'll likely start receiving loan offers in the mail from "understanding" lenders who want to "help you get back on your feet" the day your bankruptcy has cleared.
Feed those postcards to the shredder. Seriously.
You see, here's the problem. Yes, there are lenders who will finance a car purchase for you the day your bankruptcy is final. They're not lying about that. The problem is that most of these lenders are, well, crooks who make loans at Shylock interest rates and act as if they're doing you a favor.
In addition, they usually require that you purchase the car from one of their "preferred" dealers, who are "preferred" mainly because they're usually as crooked as the lenders themselves and are willing to pay them hefty kickbacks. These dealers will jack up the price, sell you a jalopy, and pocket any rebate to which you would otherwise be entitled.
What these lenders are doing is feeding on your eagerness to "get back into the game" after your bankruptcy has cleared, and they want to sell you a car and a loan before the giddiness wears off. They also want you to believe that they're the only people around who will loan you money for a car, which is utter nonsense.
The fact is that car loans are among the easiest loans to get, because cars are among the easiest things to repossess. But getting a car loan the day your discharge clears will cost you a lot more than it would if you obtained a secured credit card instead, made regular payments on it for six months or so, and then applied for a car loan.
Long story short: If you really, truly need a car the day after your bankruptcy is discharged, then go to a company that specializes in bad credit auto loan financing. Otherwise, wait a while. I promise you that you'll get better car loan deals in only a few months if you follow my advice.
The Right Way to Get a Car Loan After Bankruptcy
There is a right way to buy a car after bankruptcy. To understand this, let's look at a few characteristics of car loans in general.
Although a car loan is secured debt, it doesn't mean that it's risk-free for lenders. In the event that you default, the lender's going to lose money. Here's why:
- New cars lose a considerable portion of their value (some say as high as 20 percent) the moment you buy them, simply because they're no longer "new" once they've been sold. So if you buy a new car with no money down, the car is already worth considerably less than the loan amount as soon as you drive it off the lot.
- If you default on your car loan, the bank will have to repossess the car. That costs the bank money. Repo men don't work for free. They'll also have to pay to store the car pending auction or redemption.
- Once the car is repossessed and any redemption period has passed, it will be sold at auction, where sale prices are lower than the car's "book value" and will almost certainly be less than the amount you still owe on the loan.
- If there is any damage to the car, the sale price will be even lower, and the bank will lose even more money.
So looking at it from the bank's point of view, car loans aren't as risk-free as some people think. The loan is secured by the car itself, but cars are depreciating assets that are prone to damage; so they make for poor collateral and correspondingly higher risk to the lender.
So how does a bankrupt individual convince a lender to finance their car purchase? That's simple: by addressing the above areas of concern.
Specifically, your chances of getting a car loan from a "normal" lender (as opposed to a "bad credit" lender) will be much better if you do the following before you apply for the loan:
Make Sure You Can Afford a Financed Car
It makes no sense at all to start your recovery from bankruptcy by making a purchase that you can't afford to pay for. So look around and see what kind of payments car dealers are advertising -- bearing in mind that you'll almost certainly have to pay more because you've filed for bankruptcy -- and figure out where in your budget, exactly, that money's going to come from.
In addition, remember that lenders are going to require that you carry "full" insurance on any car that they finance -- even if it's a used car. Not only that, but many car insurers do consider your credit record when determining your rates, so having filed for bankruptcy is likely to increase your insurance rates. To be safe, call your insurer (and their competitors) to determine how much your car insurance will be before you sign on the dotted line.
Re-establish some sort of credit.
Before you apply for a car loan, obtain one or two secured credit cards, make all your payments promptly, and keep the balances well below the maximum credit lines. This will demonstrate to prospective lenders that you have some idea of how a loan works (that is, that you're supposed to actually pay it back).
Research Realistic Vehicle Choices
Your first new car loan after bankruptcy shouldn't be a Maserati. Be realistic.
Consider less-popular car models that still have good mechanical and safety reviews. Many perfectly-good cars never quite catch on with the buying public because, well, they're kind of ugly. Maybe the body designs aren't very "sexy," maybe the color choices are less-than-wonderful, or whatever.
For someone purchasing his or her first car after bankruptcy, however, these cars may be good choices. The dealerships want them off their lots, and manufacturers often offer generous rebates as incentives to expedite their departure. Dealerships tend to work extra hard to help you get financed if it means getting a car that no one else wants off their lot.
"Certified Pre-Owned" cars can also be a good deal, especially if purchased from a new car dealership. Most of these vehicles come with either the balance of the original vehicle warranty, or an after-market warranty. The first is preferable if there's a decent amount of time left on it. After-market warranties usually cover only the engine and power train, and the companies that issue them are notoriously hard to deal with when claims arise.
Most importantly, make sure to do your research first, and make sure that the models you consider have gotten decent reviews from reputable sources (like Consumer Reports, for example) when it comes to things like reliability and safety. The last thing you need is to be stuck with a loan on a lemon.
Save Up for a Down Payment
Remember that the value of a new car drops as much as 20 percent the moment you sign the purchase agreement. That bothers lenders, because the car will be worth less than you owe on it if they finance the full amount of the purchase.
That's why if you walk in the dealership with 20 percent of the purchase price of the new car in your pocket, your chances of getting a good loan deal are much better. And if you walk in with 30 or 40 percent of the purchase price as a down payment, you'll almost certainly be driving home.
Research the Best Rebates
At any given time, auto manufacturers have multiple rebates in effect for various model cars. But not all of these rebates are advertised, and some are valid for only very short times. So when you're ready to start looking at new cars, call local car dealers and ask what the best current rebates are. You'll be surprised how many unadvertised deals are out there.
Your best chance of finding rebates high enough to cover all or most of the down payment is to go car shopping during the end of the model year (September through November), when manufacturers and dealers need to move the ending model year's cars to make room for the new model year's cars.
Rebates usually should be applied as part of the down payment, in addition to whatever cash you saved up. The higher the down payment, the less risky you look to the lender, and the better your chances of getting a good loan at decent rates. A higher down payment will also reduce your monthly payments, obviously.
But if the rebate is very high, meaning high enough to cover most or all of the down payment, then consider putting at least some of the cash you saved up back into the bank.
Clean Up any Repossessions
Banks and other automobile lenders are much more concerned about repossessions than they are about bankruptcy. Most people who file for bankruptcy always managed to make their car payments on time, either because they needed the cars or because they loved them.
Lenders know this. They know that no matter how poor most Americans get, we'll almost always find a way to make our car payments -- even if it means not eating for a while. We do love our cars. No doubt about that.
So if you have a car repossessed, the lender concludes that either you're really, really poor, or that you don't particularly value owning a car. Either conclusion is a very bad thing when applying for a car loan.
Fortunately, repossessions are among the easier bad entries to get removed from your credit reports. This is because the process of repossessing a car requires so many "paper" ownership changes that whoever originally ordered the repossession may no longer have any record that the car ever existed, much less its having been repossessed.
Just as with any other derogatory credit entry, a repossession than can't be verified must be deleted from your credit report. In most cases, if you formally challenge a repossession entry, it will be expunged, simply because the company that ordered the repo either won't have the paperwork, or won't bother to reply to the verification request. Either way, the entry disappears.
Keep your Driving Record Clean
Most lenders (and all lease providers) will pull a copy of your driving record as part of the decision-making process. Why? Because they don't want to lend money or lease a car to someone who's likely to get it all banged up.
Remember, the car is security for the loan. So if your application is a "borderline" one, with the lender sitting on the fence about whether or not to finance the car for you, a bad driving record will likely tip the scales against your getting the loan.
Where to get a Car Loan with Bad Credit
Buying a car after bankruptcy is one area in which it's often better to seek financing through the dealership. Remember that both the dealer and you have the same goal in mind: for you to drive off in a new car. You want to buy one, and the salesman wants to sell you one.
That being said, car dealers usually have multiple lenders they do business with, typically running the gamut from top-notch to truly horrible. You may not be able to get a loan from the best lenders, and you don't want a loan from the worst lender. But if you follow the advice on this page, you'll have a better chance of getting a decent deal from one of the lenders in the middle.
Don't completely discount other lending sources, however. Credit unions, in particular, are often willing to make loans to bankrupt members who are on the right track to rebuilding their credit. Small community banks can sometimes be pretty easy to work with, as well. But in all likelihood, your best chance of getting a car loan is through a dealership. (Ford Motor Credit has an especially good reputation for being sympathetic to bankrupt purchasers.)
And again, if all else fails, you can almost certainly get a car loan from a company specializing in bad credit auto loan financing. You'll pay a bit more in interest, but if you really need a car, it's a way to get one. But by following the advice above, your chances of getting a loan at decent terms, from a reputable lender, will be much better.
One more thing: When the dealer reaches out to shake your hand and tell you, "You've been approved," you may be so happy that you temporarily take leave of your common sense. So take a moment before signing to ask some questions, the most important of which is, "On what terms?" Then review the loan offer, read the contract thoroughly, and make your decision.
But be realistic. You're bankrupt. Don't expect Zero Down with Zero Percent Financing. Maybe on your next purchase, but not this one. But don't let yourself be ripped off, either. If you don't like the deal you're getting, ask for a better one. Otherwise, thank the dealer for his or her time, and walk away.