5 Tips for Getting a Car Loan after Bankruptcy

Getting a car loan after bankruptcy is challenging due to your low credit score. Installment loans, like auto loans, are harder to secure than revolving credit debt. As such, many people will have to lease a car for years following a bankruptcy. If you can secure an auto loan, you will begin rebuilding your assets and rebuilding your credit. Consider these strategies to successfully source a loan.

#1 Save for a Large Down Payment

Having a large down payment reduces the risk associated with your loan for the lender. Lenders have more confidence in borrowers with high down payments because these borrowers likely have higher incomes and better financial awareness. Further, a large down payment reduces the total size of your auto loan. A smaller loan costs less over time. This is particularly true of loans after bankruptcy because they tend to have the highest interest rates. 

#2 Opt for a Short Loan

A short loan is more favorable to both the lender and the borrower in a high risk situation. You will have lower financing costs over the life of the loan. The lender will be assuming less risk because it will be recovering the funds loaned on a much shorter time table. A short loan will come with very high monthly payments. Reducing your other expenses so you can make these payments will allow you to gain the benefits of a short-term loan.

#3 Approach High Risk Lenders

Banks do not traditionally make the highest risk loans. Alternative lenders are more likely to provide your financing. In some cases, this may even include dealer lenders. Dealer lenders have an added incentive to provide you a loan because they will profit on the sale of the vehicle. These lenders are also more likely to extend a better interest rate in your direction than online or strictly high risk lenders. 

#4 Use Collateral

Most car loans use the newly purchased vehicle as collateral. However, since cars lose their value so quickly, this is an uncertain source of collateral for lenders. If you have other assets you are willing to put down, you will find it easier to get a loan after bankruptcy. This is only possible if you did not liquidate all of your assets in your bankruptcy case. Home equity, savings accounts and stock certificates can all be used to get higher loan limits on your auto loan and reduce your interest rates.

#5 Budget Effectively

The most important thing to consider when you take a car loan after bankruptcy is the security you have against another default. At this point, defaulting on the loan will create a downward spiral for your finances. Budget before you even shop for a car. Determine how much you can afford each month by following the golden principal for debt: your debt payments each month should be less than half your monthly income. This is not just your car payment; it is the sum of all your debts including rent, mortgage, student loans or other payments. paying more than half of your income to debts will not leave you enough to live comfortably.

 


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