You can still qualify for a car loan after emerging from bankruptcy. Interest rates and fees will likely be higher, though, as bankruptcy damages credit scores. Taking steps like rebuilding credit and saving up for a down payment help. Learn more about getting a car loan after bankruptcy.
How Soon After Bankruptcy Can I Buy a Car?
Bankruptcy cases typically need to be discharged before car loans are possible unless it’s a Chapter 13 case and the court approves the loan. However, waiting and re-establishing credit may help you qualify and get better rates. Bankruptcies stay on your credit report for seven to 10 years, but that doesn’t mean you’re unable to borrow money during that time.
On the positive side, eliminating or reducing debt through a bankruptcy filing leaves borrowers with extra income to take on new debt and offers a fresh start. Creditworthiness increases as credit is rebuilt and the bankruptcy filing is further away in the rear-view mirror.
Conventional lenders may not consider applicants with a bankruptcy. Applicants may have to seek a subprime auto loan through a lender specializing in working with those who have had financial hardship and bankruptcy. When looking for a lender, be wary of loans that are guaranteed for anybody or offer no credit check. Loans with high-interest rates and fees may result in negative equity in a vehicle, where borrowers owe more than it’s worth.
Can I Buy a Car After Filing for Chapter 7?
Borrowing for a car is possible after discharge, but a Chapter 7 filing remains on your credit report for 10 years. Chapter 7 bankruptcy discharges eligible debts, creating a clean slate. Chapter 7 is known as liquidation, and proceedings could require some of your property to be liquidated to repay debts. Borrowers must wait until the Chapter 7 bankruptcy is discharged before applying for a loan. The Chapter 7 process generally takes four to six months. Borrowers may need to show their discharge order before being considered for a car loan.
Can I Buy a Car After Filing for Chapter 13?
Securing a car loan is possible after, and in some cases during, a Chapter 13 bankruptcy case, which stays on your credit report for seven years after filing. Chapter 13 bankruptcy, also called a wage earner’s plan, allows individuals to pay back part or all of their debts through installments made over a term of three to five years. Interest rates and balances on debts are negotiated. A trustee receives the payments and disburses them to creditors as agreed.
During the repayment period, borrowers need to secure court permission to get a car loan. Individuals also have the option to wait until the repayment period is complete before seeking a loan. Chapter 13 demonstrates a good faith effort to repay debts and can be looked upon favorably by potential creditors.
Average Interest Rates for Car Loan After Chapter 7
Filing either Chapter 7 or 13 have roughly the same effect on credit scores. However, chapter 7 filers can’t file again for another eight years, which shows a lower risk of debt being charged off. Each of the two types of bankruptcy has its advantages and disadvantages.
The higher the borrower’s credit score before a bankruptcy filing, the farther it will drop after the filing. Borrowers with low credit scores before bankruptcy may not see their scores fall as far. The reduction in credit score is also based on the number of accounts included in a bankruptcy filing.
Interest rates on car loans are tied to credit scores from the three major credit bureaus: TransUnion, Experian, and Equifax. Credit scores range from 300 to 850, with 300-500 considered deep subprime and 501-600 considered subprime.
Used cars carry a higher interest rate since they have less value and provide less collateral for the loan. Rates for deep subprime borrowers can be around 19%, while subprime borrowers’ rates can be about 16%. New cars have more collateral for a secured loan and have lower rates for those who qualify. Rates for deep subprime are around 14%, and for those with subprime credit scores, the rate is about 11%.
Average Interest Rates for Car Loan After Chapter 13
Chapter 13 bankruptcy has the same effect on your credit score as Chapter 7, so the interest rates will be similar, based on credit score and credit history. However, creditors may be more willing to extend a loan to a Chapter 13 filer. A Chapter 13 case shows a good faith effort to repay debts during financial hardship. It also offers a history of following a budget and making regular payments.
As far as credit score is concerned, the only difference will be the period of time that the scores are affected. Chapter 13 cases take three to five years to complete, while Chapter 7 cases are typically done in a matter of three to four months.
Chapter 13 or Chapter 7 bankruptcy filing doesn’t prevent you from securing a car loan, but it affects your credit score and credit history for several years. There are steps you can take to rebuild your credit history after a Chapter 7 discharge or during a Chapter 13 repayment period:
- Monitor your credit through one or more of the three major credit bureaus. Free credit reports are available once a year. Check the number and amounts of credit accounts, as well as bankruptcy and other public records. Consumers have the right to dispute inaccurate entries in their credit reports.
- Rebuild your credit by showing a history of paying back loans through secured credit cards, credit cards, and other loans. Secured credit cards require a deposit in the amount of the credit line offered.
- Save for a down payment if possible. The ideal down payment is 20%, an amount that will improve the chances of loan approval and lower the interest rate.
- Compare rates and terms from various lenders. Pre-approval, or conditional approval of a loan, may be helpful. Borrowers can also improve their terms by having a co-signer.
- Refinance to a loan with better terms as your credit improves. This will save interest charges and help you pay off your loan sooner.
Qualifying for a car loan after bankruptcy presents challenges but is possible. Subprime auto loans through Tom Kadlec Kia are available for those who have gone through bankruptcy. New and used car loans are available to fit your budget and needs while rebuilding credit. Learn more about auto loans for all credit types from the Tom Kadlec Kia finance department.
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