Consumers can get classified as subprime borrowers in a variety of ways, such as building up a high debt load and skipping loan and credit card payments. Filing bankruptcy is a sure way to make lenders back off, but Warren Clarke, an editor for the Edmunds automotive research website, explains that credit blemishes do not completely lock consumers out of the new car market.
Definition
The Federal Trade Commission (FTC) explains that bankruptcy is a court action that absolves a person from paying certain debts. Individuals usually file Chapter 7 bankruptcy, which gets rid of almost all bills and liquidates most assets, or Chapter 13, which allows retention of some property and creates a repayment plan.
Effects
Bankruptcy puts a big negative mark on a consumer's credit because it is usually a last resort for people who cannot pay their debt, according to the FTC. Creditors view it as a sign of bad financial management and are reluctant to risk lending money to someone who has a history of not repaying what they owe. This includes all types of credit, including credit cards, retail accounts and all installment loans, such as new car loans.
Time Frame
Bankruptcy remains on credit reports for 10 years, according to the FTC, but consumers do not have to wait an entire decade to get a new car loan. They can often finance a new vehicle within a year or less, although they face more difficulties than their counterparts with high credit scores. Bankruptcy no longer affects car loan applications after it drops off the credit reports, and its effects lessen with each year because most lenders focus more on current financial performance.
Process
Clarke advises subprime borrowers to search new car loans as soon as they are ready to buy a vehicle. Car shoppers with recent bankruptcies are in a better negotiating position when they have arranged their own loans before visiting dealers. Dealerships make money from setting up financing, so they usually charge higher rates to boost their profits. Banks and credit unions often give financing to established customers even if they have bad credit. Also, some firms specialize in working with subprime borrowers, but their interest rates are typically high.
Considerations
Car buyers who get subprime loans due to past bankruptcy can often refinance their loans at better rates in as little as three to six months, according to the Car Buying Tips website, although it often takes a year or two. Consumers must diligently rebuild their credit during that time, which requires having a modest number of credit accounts, using them regularly and making every payment by the due date. Such activities raise a person's credit score and show prospective lenders that these consumers are capable of handing their finances responsibly, the FICO credit score company explains.
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