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Getting a Car Loan after Bankruptcy — Step Four: Buy A Car.
May 10, 2007 | 2 Comments
Step four — Get a car loan. Very quickly, a recap of what you’ve done since your bankruptcy discharged:
- You’ve been saving cash and all of your important financial records like paystubs, bank statements, etc.
- You have a secured credit card (or two) that you’ve used only once and that has no balance.
- You have saved enough money to have an emergency fund AND a down payment for a car.
Usually, this process takes a few months (3 to 6). As long as all three of the above statements are true, you’re ready to buy a car after your bankruptcy.
Remember that the car you buy after bankruptcy is going to have a high interest rate (at least at first). There’s no way around it. It’s a fact of the re-establishment process. But if you follow this advice, in a year or two you’ll be getting the same rates advertised on TV and driving the car you want.
OK – time for a reality check. You filed bankruptcy less than two years ago and you still haven’t fully re-established. At this point in time, banks are only going to give you a car loan big enough for basic transportation. That’s about $10-$15k. Depending upon the age of the vehicle you want to buy, you’re going to get a loan that’s only 3 to 5 years in length (anything longer is considered too risky). Finally, it’s going to be hard to buy a vehicle that’s more than 4 model years old or that has more than 60k miles. While there are exceptions to all of this, these are the basic facts.
When a lot of people find these things out they become discouraged. Many trucks and SUV’s are too expensive for someone who is still trying to re-establish (at least according to most banks). Sometimes, people decide to wait to buy until something changes.
But buying a car makes sense because you’ll re-establish faster if you do so. By combining your good payment history from step 3 with 6 to 12 months of car payments made on time, your credit score is going to climb into the mid to high 600′s and you’ll have credit history to back it up. In other words, you can be re-established 6 to 12 months after buying a car.
But if you choose not to buy a car, it could take two or three years to re-establish. While there’s nothing wrong with waiting, a lot of people can’t afford to do so. If that’s the case, then the best thing to do is to remember your next car purchase isn’t going to last forever.
Like I said, if you make 6 to 12 car payments on time your credit score should climb considerably and your credit will be re-established. That means you only need to keep the car you buy for a year or less. Here’s how to buy that car and re-establish as inexpensively as possible.
First of all, buy a car that’s 2 or 3 years old. If you buy a new car, you’ll lose thousands of dollars in depreciation when you go to trade it in next year. If you buy something 5 or 6 years old, you’re going to have to deal with repairs. Second, get something that has high resale value — small cars and small SUVs are best. Third, try not to spend more than $10,000. The less you spend on the car the more you’ll save in taxes, finance charges, and depreciation over the next year. Think of this car as a very short term investment and treat it like gold. Your goal here is to lose as little as possible when it’s time to trade. Finally, put at least 10% down (preferably 20%), and only finance with a nationally known bank (examples include Ford Credit, Toyota Credit, GMAC, BankOne, Wells Fargo, Chase, etc.). Local regional banks or credit unions won’t help your credit build as much as a national lender.
If the prospect of driving a cheap used car doesn’t get your motor running, I understand. But it is the smartest way to re-establish. If you do find a way to buy a more expensive car, make sure that you make every attempt to refinance the loan starting six months after you buy it. Refinancing a car is harder than buying a new one and you may have to wait as much as two years before you can drop the interest rate on your loan. That’s why I recommend buying a cheap used car and trading it in.
See How to Buy a Car After a Bankruptcy for tips on getting the best deal.
In steps one through four you’ve put yourself on pace to be re-established within 12-18 months of your bankruptcy discharge. Re-establishment is nearly complete.
Getting a Car Loan after Bankruptcy — Step Five: Get More Credit
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[...] Getting a Car Loan after Bankruptcy — Step Four: Buy A Car. [...]
I understand what you’re saying about obtaining the car loan from a major bank; however, this is virtually impossible, especially if we are talking about 3-6 months out. Early on I set a goal to re-establish things as quickly as possible. I’ve been working non-stop for 4-5 months and I have built up to well-over a six-figure income & and solid cash reserves, in addition to a 60% down payment to purchase a vehicle. I’ve been trying to borrow the other $10-15k, and no bank will touch it. I can’t imagine anyone being in better shape less than 6 months out either.