After filing for Chapter 13 bankruptcy protection, some people conclude that the days of applying for a car loan are over. Quite the contrary; it's possible to get an auto loan after bankruptcy. And if you make your payments on time and satisfy the debt, acquiring an auto loan can help your credit in the long run.
Re-establishing Credit Score
Credit damage from a bankruptcy lessens with time. But you can jump-start credit improvements by taking steps to re-establish and rebuild your credit soon after a discharge. Getting a new line of credit helps build a better score. But since many creditors are less likely to approve you for an unsecured credit card after bankruptcy, visit your bank to see if you meet the criteria for a secured credit card. These cards do not require good credit, but you will need a security deposit and an income source. Paying this credit card on time and managing the debt helps improve a low score.
Make a Down Payment
Down payments can help you get a car loan after Chapter 13 bankruptcy. While many lenders approve borrowers without down payments, financing the vehicle with a down payment (perhaps 10 percent or 20 percent down) can convince a hesitant auto lender to approve the car loan request.
Sub Prime Lenders
Lenders differ; and while one auto loan company may eagerly offer fresh start loans to people with a Chapter 13 in their recent past, another loan company may only work with prime borrowers or people without credit issues. Don't let a rejected loan application stop your car-buying efforts. If one lender rejects you, talk with another loan company.
Car Loans and Co-signers
Not everyone with a Chapter 13 has a co-signer on standby. But if there's someone available to co-sign your auto loan, use this person to help you qualify. Because co-signers accept responsibility for the auto loan if you fall behind on payments, lenders are more likely to approve your loan request. To be eligible, co-signers need steady income and good credit.
What to Expect
Getting a car loan after a Chapter 13 bankruptcy doesn't usually result in the best financing terms. A recent bankruptcy places you in a high-risk category; and if the chances of default are higher, lenders charge a higher interest rate or financing fee for the loan. The higher your rate, the more expensive your car payment. This is why it's important to rebuild your credit first, then finance a car.
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