Can I Get a Car Loan After Bankruptcy?

Chapter 7 vs. Chapter 13 Bankruptcy

There are two main types of personal bankruptcy: Chapter 7 and Chapter 13. Each has its own process and its own methods for dealing with your debts, and the type of bankruptcy you pursue also can influence your ability to take out a car loan.

Once you file Chapter 7 bankruptcy, it may be impossible to get approved for a new loan until your eligible debts are discharged, a process that typically takes four to six months.

If you file Chapter 13 bankruptcy, you'll need the court's permission to take out a car loan (or any other new credit) during the three- to five-year period during which you make payments to the court to compensate your creditors.

Where to Get a Car Loan After Bankruptcy

Lenders typically view bankruptcy as a major red flag. Some will not work with anyone who has a bankruptcy listed on their credit report, while others won't consider loan applications until a year or longer after your bankruptcy filing.

Fortunately, because a car loan is a form of secured debt in which the vehicle serves as collateral, it's one of the easier forms of credit to get in the wake of a bankruptcy.

You may need to work with a lender that specializes in loans to borrowers with tarnished credit, however, and if you do, you can expect to pay relatively steep interest charges, and a high down payment and fees.

Getting traditional dealer financing or a loan from a major bank may be challenging right after a bankruptcy. Here are some more promising paths to car financing after a bankruptcy:

• Credit unions: Credit unions often offer members better terms on car loans, and you can typically join one by opening a checking or savings account with a modest initial balance. Note, however, that if you belonged to a credit union when you filed bankruptcy, you may lose your borrowing privileges there, particularly if your bankruptcy discharged debt you owed to the credit union.
• Specialty lenders: Seek out third-party auto lenders that work with bad credit, including online lenders. You'll likely pay a higher interest rate than shoppers with good credit, but once you secure a loan directly with a lender, you can purchase a vehicle at any dealership.
• Online car retailers: National sales sites such as Carvana and CarMax promise credit terms for buyers with damaged credit, and allow you to get prequalified to give you a quick idea how large a loan you might be eligible for.
• Buy here, pay here (BHPH) financing: BHPH dealers provide in-house financing on cars they sell, and they often focus on buyers with poor credit or no credit history at all. Their vehicle selection is often very limited and, in addition to high interest rates, they may require steep down payments and a bi-monthly or even weekly payment schedule. Their repossession policies may be more severe than those of more conventional lenders as well. If you go this route, check with your state attorney general to understand how BHPH financing works in your state.

Learn more: How to Get a Car Loan With Bad Credit

How to Get a Car Loan After Bankruptcy

Here are steps to take when you're ready to get a car loan after your bankruptcy.

1. Get the Court's Permission, if Necessary

If you are pursuing a Chapter 13 bankruptcy, work with your attorney to secure the court's approval before you seek a car loan.

2. Check Your Credit

Before seeking a car loan or any other personal credit, knowing your credit score can help you see where you stand. After checking your FICO^® Score^☉ from Experian or another source, you can determine what range your score falls into, and how favorably lenders are likely to view your application.

3. Arrange a Down Payment

With your credit dinged in the wake of a bankruptcy, you should plan on putting down at least 10% of the purchase price, so plan accordingly. Keep in mind that you may need some additional cash to cover fees when you take out the loan. This could mean you have to extend your timeline for purchasing a vehicle.

4. Consider Loan Preapproval

Once you've got your down payment pulled together and you're ready to shop for your car, consider getting preapproval on the loan from your credit union or one or more specialty lenders. A preapproval letter shows car dealers that you're ready to buy and gives you flexibility to shop around with multiple sellers.

5. Shop Around

Start your search to find the best deal you can get on an affordable car that meets your needs. Stick to cars you can comfortably afford. A payment plan that stretches your budget is inadvisable when you're rebuilding your finances after bankruptcy.

Learn more: How to Buy a Used Car

How to Improve Your Approval Chances After Bankruptcy

If you're turned down the first time you seek a car loan after bankruptcy, or if you just want to beef up your credit profile before you apply, here are some time-tested approaches to improving your odds of car loan approval after a bankruptcy:

• Improve your credit score. You could improve your odds of qualifying for a traditional auto loan, and potentially save on interest charges, by working to build your credit for six months to a year before you apply for a car loan. Consider opening a secured credit card or a credit-builder loan (with permission from the court, if required) and making payments on time, every month to begin re-establishing a positive payment history.
• Make a large down payment. A 10% down payment requirement is typical when you're financing a vehicle with a recent bankruptcy. If you're prepared to put down 15% or even more, you can significantly reduce the amount you have to borrow. That, in turn, may increase your chances of securing a loan with decent interest rates.
• Keep it affordable. All things considered, it's easier to get a loan for a relatively small amount than for a larger amount. So instead of that fancy ride you long for, you may have better luck financing a decent used car or an economy-priced new model.
• Get a cosigner. If a friend or relative with good credit is willing to vouch for you, they can help you qualify for a car loan (and possibly get a lower interest rate) by cosigning on your auto loan. A cosigner shares responsibility for paying the loan with you, so if you miss payments on the new loan, you'll hurt their credit scores as well as your own.

The Bottom Line

Getting a car loan after bankruptcy can be an important first step on the road back to strong credit. Making your car payments on time every month, without fail, can help re-establish a solid payment history. Checking your credit score regularly and signing up for free credit monitoring with Experian can help you track the credit recovery that comes with steady payments and prudent credit management.