Acquiring a car loan can at times be hectic for most individuals; however, the process is not as rigorous as you may imagine, even if you were once declared bankrupt. Notably, obtaining a car loan can be one of the ways of rebuilding your credit after being insolvent. Assuming you have decided to buy a car, the next step should be obtaining it at an affordable price. Thus, a bankruptcy filing should not make you vulnerable to predatory lending practices.
There is a correct process you can follow to buy a car after bankruptcy. However, to understand that, it is necessary that you identify some features of a car loan: it is a secure debt; nonetheless, that does not imply that it is risk-free for lenders. In fact, if you default on payment, the lender is susceptible to lose his or her money, especially when the car breaks down. Thus, from a lender’s viewpoint, automobile loans are not risk-free because the vehicle acts as security itself. Notably, cars are depreciating commodities, which are prone to damage. Hence, they make weak collateral and are a simultaneously higher risk to the lender. Additionally, the lender is aware that you pay the car loan alongside other bills and that is why they may be willing to consider people with a bankruptcy record for a car loan.
Obtaining a car loan from a reputable lender rather than a bad one can be much simpler if you follow the steps listed below before submitting a loan application.
Ensure You Can Afford a Financed Automobile
It is irrational to commence your bankruptcy recovery journey by purchasing a commodity that you cannot afford to pay. Therefore, when contemplating to buy a car, it is advisable you compare the prices of various car dealers and choose wisely and be ready to convince the bank or lender that you can afford the payments. If you are successful in persuading them to finance a loan, they will contact the dealer to discuss terms and may even attempt to negotiate a better deal for you. Additionally, check how much insurance will cost since lenders will expect you to cover the insurance cost for any vehicle they finance. Remember, before signing an agreement with any lender, ensure that you can afford the payments. If you cannot, then it’s time to find an alternative lender.
Improve Your Credit Score
Before applying for a car loan, you may want to consider obtaining a secured credit card to build credit. This can be done by, among other things:
- Making all payments promptly, and
- Operating below the maximum credit line
To be even safer, get an unsecured credit card from a reputable bank, make timely payments for at least a year, and keep the balances low. Such merits can help you improve your credit score over time which in turn may help you qualify for a loan; particularly if you can raise 20-25% of the down payment for the car.
Choose a Realistic Car Model
You should not expect to buy a Bugatti Veyron with a car loan after bankruptcy. Consider a certified pre-owned car or a lesser known brand, which has good safety features, is mechanically sound, and is well reviewed. Notably, avoid vehicles that possess aftermarket warranties because they are hard to deal with should a claim arise.
Save for the Down Payment
Lenders are bothered by the huge depreciation value of a vehicle upon signing the purchase agreement and driving it off the lot—20% of its value. Hence, should you cover that shortfall by carrying an equivalent amount into the dealership as the down payment, you can be confident that you will likely drive home a new car of your preference.
Identify the Best Rebate
Motor manufacturers have several rebates in effect on most models. However, they are not advertised; hence, when you are ready to buy a car, confirm with the local dealers the best rebates they have and choose the one that pleases you. Discounts are treated as a fraction of the down payment, and the more you pay for the down payment, the higher your chances are of qualifying for a loan at a favorable rate. Additionally, a higher down payment means reduced loan payments. Thus, inquire with multiple dealers about their rebates and promotions before signing a loan application.
Avoid Repossessions and Keep a Clean Driving Record
Avoid car repossessions. By doing so, the lender will not judge you based on a past repossessed car. Most lenders are more cautious about working with people who’ve had a vehicle repossessed than they are about bankruptcy. If you have a record of a previous car repossession, lenders will assume that you are poor or less interested in owning a car. Additionally, keep a clean driving record. Your driving record is taken into consideration by most lenders when deciding whether to approve you for a loan—they’re concerned you might damage the car. Remember, the car acts as collateral for the loan.
Overall, make timely payments to avoid having a vehicle repossessed and keep a clean driving record. Both can help improve your chance of qualifying for a loan.