If you are looking to buy a car for a strictly functional purpose and not as an investment, a used car is the right choice. Why?
Filing for bankruptcy is the clearest declaration of financial trouble. It fills your schedule with a tedious court process and your credit rating takes a hit. It is an ugly mark which does not go away easily. Also, it means you will have trouble getting an auto loan.
Types of Bankruptcy
You can file for either a Chapter 7 or a Chapter 13 bankruptcy. A Chapter 7 bankruptcy entails that you have little or no money, and your capacity to pay back debts has been seriously hurt. A Chapter 13 bankruptcy encourages reorganization. The court comes up with a plan for you to comfortably pay back your debt based on your current income.
Stigma of Bankruptcy
A chapter 13 bankruptcy stays on your credit report for 7 years. But, if you have filed for chapter 7 bankruptcy, it will remain on your credit report for a decade. Lenders understand that bankruptcy will leave a stain on your credit score for a very long amount of time.
They understand that even though bankruptcy means rough conditions, it does not completely erase your ability to pay back an auto loan. In fact, if you successfully battle and come out of bankruptcy, it is seen as an example of your resolve and strength.
Practical Tips
1. Have Realistic Goals
Do not expect to qualify for huge auto loans right after completing bankruptcy. The most practical way is to select a car that is not unreasonably expensive. Get a co-signer, a parent or a spouse/partner preferably, and be confident while pitching the idea to them. Present the lenders with proof of the co-signer’s financial stability and good credit score.
2. Gainful Employment
Lenders find it extremely reassuring if you have a steady job at the time of loan application. Even if you have filed for bankruptcy, knowing that you make a firm amount of money regularly and that you are gainfully employed makes it more likely for them to trust you with the auto loan amount.
3. Spending Decisions
Take an honest look at the reasons you had to file bankruptcy in the first place. If you have an uncontrolled spending problem, try to consciously spend less money and use it only on necessities. Make a budget and stick to it for your own well-being.
4. Pay Attention to the Details
If your application shows a clear sense of financial responsibility on your part, lenders will have fewer issues with the auto loan and the interest rate. Lenders charge a high rate of interest on a post bankruptcy auto loan because it has a higher risk associated with it.
All this goes to say one thing: be careful while applying for a post-bankruptcy auto loan. Be honest with the lender, plan out in advance, put forth a strong case, and consider all the conditions before agreeing to take the loan. It is infuriating but it is not impossible.
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