What Are The Risks of Bankruptcy Car Loans?

Bankruptcy car loans are a unique type of high risk loan extended to those individuals with a bankruptcy in their recent financial history. Each state has a statute of limitations on bankruptcies. Some states allow them to expire on your credit score after 5 years, others 15. If you are within the statute of limitations, however, you will have difficulty receiving a loan. When you do, you will need to be aware of the risks of this type of loan in order to make the best decision.

High Interest Rates

A bankruptcy car loan is a high risk car loan, meaning the borrower has a bad credit score and would not qualify for most loan programs. As a result, the borrower must go to a specific high risk lender in most cases to secure the financing. High risk lenders serve an important purpose on the market by financing purchases for those people who could not otherwise get a loan. However, they also profit off of the situation by charging interest rates well above the normal level. 

Bad Terms

Lenders like to provide themselves with some protection against loan modification when they are extending high risk loans. Many individuals who seek a loan immediately following a bankruptcy attempt to refinance the loan a few years down the line. This allows them to get a much better interest rate as the bankruptcy is pushed further back on their credit history. Loan modification costs the lender a portion of their profits. Because this is a high risk with bankruptcy car loans, lenders build in disincentives to engage in this practice. Typically, there will be extremely high fees for attempting to modify or settle the debt before it matures. 

Risk of Loss of Assets

Many bankruptcy loans will be extended based on collateral of some type. It is unusual to get a high risk loan without securing it against the asset, and it would be much more expensive to do so. Borrowers often opt to secure the loan. It is possible to leave the title to the vehicle with the lender until the loan is paid to secure a car loan. While this makes the loan easier to achieve and less expensive, it also places the burden of risk on the borrower. If you default, you will lose the asset. After a bankruptcy, you need to focus on rebuilding your asset base. This loss could be detrimental. 

Default

The worst case scenario in any loan situation is default. This is a particularly large threat for those who have already gone through a bankruptcy filing. Rebuilding a credit score after bankruptcy will take years and any negative activity on the credit report in that period of time will be multiplied many times over. Missing a payment is inadvisable in all situations, but particularly in this case. Default could lead to a second bankruptcy filing or a lifetime of debt and bad credit. Sticking to a loan you can afford and maintaining an emergency fund is the best way to guarantee against this. 

 

 


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