How to get a car loan after bankruptcy: It’s tough but possible

Applying for a car loan after bankruptcy can feel daunting. And while it’s true that receiving a competitive post-bankruptcy car loan can take extra leg work, it is still possible. That work includes checking and improving your credit and seeking lenders with flexible eligibility requirements.

How to get a car loan after bankruptcy

Many lenders see a recent bankruptcy as a red flag. They may worry you will default on your loan if they lend to you. These extra steps can help you find a lender willing to work with you.

Step 1. Decide whether it’s smart

If you filed for bankruptcy, you’ve likely weathered some financial troubles. Think through whether seeking a car loan is the right choice for your finances.

• Affordability: Any car you purchase should be well within your budget. Ensure that it is by calculating the cost of ownership, not just the sticker price. Lenders will want to see you have a steady income source and don’t plan on spending more than you can afford.
• Current transportation: If you already have reliable transportation, it may be best to hold off on buying a car. Your interest rate will likely be less than ideal with bankruptcy still on your credit report.
• Using cash: Avoiding an auto loan before bankruptcy is off your record may be the best option. By using cash, you can skip the loan entirely.

Step 2. Check your credit

A bankruptcy on your credit file significantly lowers your score. Bankruptcy harms your credit for seven to 10 years, but it’s weighted less as it ages. This means your credit score will likely be higher in your ninth year of having a bankruptcy on your report compared to immediately after bankruptcy.

The better your credit is, the more favorable your borrowing terms. Check your credit score before diving into a new car loan application. This way, you can be more confident about your position as an applicant. The three main credit bureaus — Experian, TransUnion, and Equifax — can provide you with your credit score.

No matter how long it’s been since your bankruptcy, it’s wise to improve your score before shopping. Check out Bankrate’s tips for building your credit score.

Step 3. Budget for a vehicle down payment

Making a down payment often increases your odds of approval. It shows lenders you are responsible enough to save up before a big purchase. A down payment is especially important if you have a low credit score due to bankruptcy. By lowering the amount you borrow, you decrease the lender’s risk.

As a bonus for you, borrowing less money means paying less in interest over time. Experts suggest providing a down payment of at least 20 percent, but if that’s out of reach, do what you can. Use a down payment calculator to see how much money you could save with various amounts.

Step 4. Shop around

The key to finding the best car loan is comparing offers from many lenders. Each lender has its own requirements around credit score, employment history or income, so the more you check out the better chance you have of finding the right fit.

As you browse lenders, look for ones clearly stating their credit requirements. Some will specify you need a certain credit score or cannot have recent bankruptcies. Look for lenders that allow prequalification with a soft credit check. You can check your approval odds and preview likely rates through prequalification without further hurting your credit score.

Finally, before heading into a dealership, it is a good idea to apply for loan preapproval. Preapproval requires a hard credit check, but a preapproved offer holds more weight than prequalification. It will give you negotiation power at the dealership and a firm understanding of your budget.

Types of bankruptcy

The two most common types of bankruptcy are Chapter 7 and Chapter 13. When deciding whether to approve your car loan application, a lender runs a credit check. At this point, lenders will learn about your bankruptcies. Before moving forward with a new loan, it is important to understand the specifics of which you filed for.

Chapter 7 bankruptcy

The court takes legal ownership of your nonexempt possessions when you file for Chapter 7 bankruptcy. Giving up these assets to be liquidated means you can walk away from most debts. This type of bankruptcy remains on your credit report for up to 10 years.

Chapter 13 bankruptcy

Filing for Chapter 13 bankruptcy — also known as a wage earner’s plan — allows filers to create a plan to pay off debts. Following court approval, the plan typically includes paying fixed amounts over a predetermined period, usually three to five years. Chapter 13 bankruptcy can remain on your credit report for up to seven years.

Ways to finance a car after bankruptcy

Bankruptcy doesn’t have to stop you from securing an auto loan. However, keep in mind your lender options may be limited, and you’ll likely get hit with a high interest rate. The best auto loan rates are reserved for borrowers with good to excellent credit.

Bad credit lenders

Bad credit lenders have flexible lending requirements. That makes them an option for borrowers who have filed for bankruptcy.

These lenders, such as Upstart and Autopay, may approve borrowers with FICO scores in the 500s. Pay close attention to the interest rates and terms being offered and compare rates from multiple lenders to find the best option.

Credit unions

If you’re a member of a credit union, you can try applying for an auto loan there. Since credit unions are not-for-profit, member-owned organizations, you may have better luck securing financing. Plus, you might be able to secure a lower interest rate.

Adding a co-signer

If those options don’t work, consider getting someone with good to excellent credit to co-sign an auto loan for you. Benefits of a co-signer include increased odds of approval and a more favorable rate and term.

But before going this route, explain to the person their rights and responsibilities as a co-signer. If you default on your loan, the co-signer will be responsible for the payments and you may hurt their credit.

Buy-here, pay-here dealerships

During your search, you may encounter buy-here, pay-here dealerships that don’t require credit checks. As appealing as this option may be, it should be your last resort.

Due to high interest rates, you may pay more than the car is worth. And your credit may not improve if your loan program does not report on-time payments to the credit bureaus.

The bottom line

A bankruptcy can add a few obstacles to your car-financing experience, but it’s not always a complete dead end. Having a steady, reliable income and working on improving your credit score can help you secure a car loan after bankruptcy. Research all your lending options before you take out a loan to work and secure the best rate available.