Bankruptcy and Its Effect on Auto Loans

The effects of bankruptcy on auto loans is not as dire or as far reaching as you might think. In fact, acquiring and repaying auto loans can be the surest and best way to rebuild your credit after having to declare bankruptcy, especially as auto loans will usually be the first secured loans that you can qualify for under the circumstances.


Declaring bankruptcy does not mean that you cannot qualify for any credit for the next 7 years. In fact, merely by obtaining a good credit record of 2 years or longer should enable you to look to conventional lenders for your loans with hope. While it is true that immediately following bankruptcy you will be forced to look to sub-prime lenders for your loan needs, it is in the act of opening up new lines of credit with such lenders and credit card companies that you will be able to re-establish a good credit history and score. Of course, this doesn't mean the road will be all roses and sunny days. Bankruptcy effects auto loans such that it makes it difficult to get low interest rates; meaning the rates offered to you will be a few points higher than the traditional 5 or 6%, which can increase your monthly out-of-pocket payments by as much as $100 to $150.

Back to Basics

In bankruptcy circumstances, its important to know the basics that go with obtaining an auto loan. While you won't get the best interest rates, this doesn't mean that you have to settle for whatever comes your way. You should always shop around to see who offers you the best rates with the best terms. Always be aware of any early payment fees or penalties that the lender attaches to the life of the loan as well as whether they are offering you merely an introductory rate that could skyrocket later down the line. Finally, budget your money well in advance so that you can offer a down payment of 20% or more on the vehicle. This reduces the risk of default in the lenders estimation and will allow them to offer you a better rate.

Other Tips

Besides these basics there are some rarely known facts that can help out the bankruptcy auto loan seeker. Unlike the loan environment of the 80's, it is possible to refinance your auto loan so that two years down the line, even if your rates go up, you could qualify for a better one. However, you should only do this if your current loan doesn't have early repayment fees. Moreover, you might actually hurt yourself if you wait too long because, often, the majority of the interest is paid at the beginning of the loan. Waiting too long to refinance could actually increase your out-of-pocket expense in such cases.

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