How Does A Bankruptcy Car Loan Affect Your Credit Score?

Bankruptcy car loans are available to those individuals who have a bankruptcy on their financial records. There is a statute of limitation on all bankruptcies that varies by state. If you are within that statute of limitation, you may need to seek this unique type of loan in order to secure your financing. Your credit score is already very low after a bankruptcy, and this type of loan can help you overcome that low score if you are able to handle the debt well.

Installment Loan Approval

Getting approved for a loan almost always raises your credit score, especially when the loan is an installment loan. Installment loans are distributed in a lump sum, the principal, which is then repaid through monthly payments. Unless you have too many loans on your record, getting a new loan will show other lenders that you are worthy of financing. Furthermore, diversifying your debt with an installment loan keeps your credit report balanced.

Positive Results of Making Payments

Every time you make a payment on time, your credit score will go up a nudge. Over a 3 to 5-year car loan, this means you will have between 36 and 60 opportunities to increase your score. When you are a high risk borrower, you will likely see higher interest rates and higher monthly payments. This can make it hard to meet the demands of your monthly payment schedule. However, if you are able to make all of your payments without going 30 days late, you will end your loan term with a much higher credit score than when you began.

Score Increase for Paying Off Loan

The biggest jump in your credit score will come when you pay the loan off in its entirety. This is only true if you pay the loan off on schedule, however. Bankruptcy car loans will not often have favorable loan terms for the borrower. Many borrowers will seek to modify the loan in the future by refinancing, consolidating or even settling. If you can avoid this behavior and simply pay off the loan on schedule, you will see your credit score increase significantly. 

Higher Risk Means Higher Reward

Your high-risk loan will mean you have high interest rates and bad terms. However, if you avoid the temptation to opt for a less risky loan by using a cosigner or collateral, you will see much higher rewards on your credit score. Your higher credit score will make all of your future loans less expensive. If you consider the long-term effects of the loan, you may decide a riskier loan has more payoff for you than a cosigned or secured loan.

 


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