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The subject of bankruptcy is a very sensitive one amongst the population, especially for people that view is as a negative event in their lives. The fact is that bankruptcy can be seen as financial jail sentence or as a new opportunity to build yourself into a financially independent individual. Usually, before or after a bankruptcy people think that there will be no financing options available to them and that everything from now on will be paid cash. Reality is different, and there are many options available for people that have been through bankruptcy and are ready to reestablish themselves. When it comes to car financing after bankruptcy we need to keep in mind that there are two types of bankruptcy filings:

* Chapter 13: In simple terms this kind of bankruptcy means that the court assigns a trustee that organizes a payment plan for the debtor and he/she must follow it through the bankruptcy process. What does this mean when it comes to applying for a car loan after bankruptcy? This means that the trustee is responsible for managing and controlling debts, so you would need to get written approval from the trustee before moving forward with the loan application.

* Chapter 7: This type of bankruptcy liquidates all of the debtor’s assets and distributes what is available to the creditors. Chapter 7 means that after assets are sold, whatever is not paid will be discharged by the court of law. Please note that during the process there will be a meeting called the 341 proceeding. This proceeding is a critical part of the car financing part because no lender will even consider your application until this meeting is taken care of. What does this mean when it comes to applying for a car loan after bankruptcy? That the 341 proceeding must be taken care of before applying for a car loan, and that unlike chapter 13 bankruptcy, you will not be under a repayment schedule for years.

You might be asking yourself what steps you should take to secure a car loan after bankruptcy, so here they are:

1. Check your credit score - The first step is to check your credit score as this will tell you where you are currently standing. An important factor here is how long ago did you file bankruptcy and if you have made on time payments after the bankruptcy. For example, it would look much better if you had a bankruptcy three years ago and have made credit card and car payments on time, than if you had it two years ago and already have a few late payments. It is critical to show that you are ready to improve your payment history by facts and actions. There are both free and paid resources where you can check your credit scores online. Note: Even reports that need to be paid offer a once a year free credit report, so it is highly advisable that you take that approach.

2. Save for a higher than average down payment - Remember that until you can prove by your new credit history that you will make payments on time you are considered a “riskier” loan, so you need to be prepared to pay a higher down payment. The main reason is that not only does a higher down payment lowers the risk of the lender, but it also shows that you have taken action to budget and have the disposable income.

3. Try to get pre-approved - By getting pre-approved for an auto loan, you have skipped the line of tasks and gone straight to knowing how your loan terms will look like. For example, after getting pre-approved you will have an idea of what your interests, terms, loan amount, and loan duration. Also, it is better to go into a dealership with a pre-approved loan than going in looking for a loan.

A very important step will be to check rates online:

* Expect higher interest rates - As we discussed previously on the need of paying a larger down payment, your loan is considered “riskier” than standard loans, so you should be prepared to pay a higher interest rate. Rates for customers with recovering credit usually ranges from 15-20%.

* Know if it’s worth it - Since you will be paying a higher interest rate, you need to think if it is actually worth the time and effort to borrow money at the rate the lender is offering. Remember that interest simply means the amount of money it costs to borrow money. For example, if you borrow $10,000 at a 20% interest rate, is it worth paying ⅕ of the total price on top of it just to borrow the money? If it is, then keep on going!

* Check if fixed rate or variable rate auto loan is the most convenient for you. In simple terms, fixed rate means you will know your specific monthly payment and even if interests change, the interest on your specific loan will not. Variable auto loans are the opposite, and your monthly payment will vary depending on the market rates.

After researching for lenders, interest rates, calculating your initial down payment, and finally trying to get pre-approved for an auto loan, you should be in good shape to start building your credit back up. Remember, stay positive because it takes time and effort to find the best deal for you!


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