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How to Buy a Car After a Bankruptcy
May 9, 2007 |
Buying a car is usually fun and exciting, but when you’ve had a recent bankruptcy buying a car can be no fun at all. But fear not — if you know how your bankruptcy affects the car buying process you can avoid a lot of trouble and unpleasantness.
In an ideal situation, before buying a car after a recent bankruptcy it’s best to have some credit re-established first. Read Getting a Car Loan after Bankruptcy to learn more about re-establishing.
When buying a car after a bankruptcy, make sure to follow these tips.
1. Set a budget for your purchase. Banks have very specific policies when lending to people with a recent bankruptcy. Typically, you can only borrow half of your annual income or less — if you make $40k a year, that means the most your can borrow for a car is $20k. Banks will also limit your monthly payment to 10-15% of your gross income. For example, if you earn $3000 a month your loan payments must be $300-$450 a month. Third, banks want you to buy a vehicle that is less than 5 years old and has less than 60k miles. Using these three criteria, you should be able to figure out what you can buy. When looking at a vehicle, make sure it meets all of these criteria before negotiating. If it doesn’t, you may be wasting your time.
2. Don’t shop for a vehicle without having a down payment of at least $1,000. If you have no money to put down (or no trade-in with equity), you have little or no chance of getting a loan. Ideally, you would have 10-20% of the vehicle’s price as a down payment.
3. Before visiting a car dealership, get a couple of rate quotes online. With just a few minutes of work you can find out what interest rate you can get and even have some dealers call you and make you an offer for your business.
4. Don’t tell the dealership you have had a recent bankruptcy until you’ve found the car you want and negotiated the price. If you tell them you have a bankruptcy up-front, they will usually offer to get you “pre-qualified” and then tell you that you can only buy one or two cars they have on the lot. If you’ve followed my guidelines above, you don’t need any help getting pre-qualified.
5. Once you’ve told the dealer about your bankruptcy, make sure that you’re completely open and honest about your financial situation. If you mislead the dealership here they will have a very difficult time getting you approved. Also, bring all of your financial documents with you including your most recent paystubs, bills, bank statements, and a copy of your bankruptcy paperwork. Allow the dealership to make copies of all of these documents — they’ll need them to get your loan approval.
6. When the dealership quotes you payments, ask them to write down the interest rate and everything that’s included in the payment BEFORE you agree to the deal. Dealers tend to “pack” payments with extras you don’t need or want like undercoating, credit insurance, etc. Ask them if they’re including these things in your payment.
7. Don’t take delivery of a car until the financing is approved by the lender. Often times you can take a car home without your financing being approved because the dealership believes they can get you a loan at the agreed upon terms. However, if the dealership is wrong and they can’t get you the loan they offered you, they’re not obligated to honor your agreement. In fact, in many states the dealership can raise your interest rate, your payments, your down payment, etc., and then force you to sign the new agreement or charge you a substantial penalty because you took their car home without approved financing. Make them show you an approval sheet from the bank and put in writing that your loan is approved BEFORE you drive the car home. Don’t agree to a “bailment” clause until you have seen both of these things.
8. When you’re meeting with the dealership’s finance manager, he may tell you that you need to buy an extended warranty or credit insurance to get your loan approved. This is a lie — you don’t need to buy anything extra to get your loan approved.
9. If the car you’re buying is going to be traded-in within the next 18 months, don’t buy any extras. That includes an extended warranty (unless the warranty is only for the next year or two), credit insurance, alarm systems, etc. These extras are going to increase the amount of your loan by thousands of dollars but they’re only going to increase the value of your car by a few hundred dollars.
10. Don’t by any anti-theft etching, TheftCode, TheftGuard, VIN Etching, etc. Dealers usually charge $100 to $400 for this product and it has little or no value. It’s a total rip-off and it should be illegal to sell it, but it’s not. Most dealers try to sneak it into your purchase paperwork, so read everything carefully and ask questions if you find something you don’t understand.
11. Also, you should never buy any credit life or disability insurance on a car loan. While life and disability insurance are both good things to have, policies offered by your car dealer are ALWAYS overpriced. If you want life or disability insurance, call your insurance agent.
Finally, it may take a few tries to get the car and financing you want. Different dealers have different lending resources — you may be able to get two completely different interest rates at two different dealers, even if they’re the same brand (i.e. both Ford, Toyota, Hyundai, etc.). That’s why I recommend getting some online financing quotes before you start shopping. That way, when you find the car you want at the right price you’ll know what a good interest rate is.
Good luck!
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