A car loan can help you finance a car purchase. However, getting a car loan may be challenging if you have gone through the process of bankruptcy recently. How soon you qualify will depend on the lender you work with and some loan details. Some people may get approved for a loan right away after bankruptcy, while others may have to wait a few months or years for approval. Continue reading to learn what you can do to improve your chances of getting a car loan quickly after bankruptcy.
How Bankruptcy Impacts Your Ability To Get a Loan
There are two kinds of bankruptcies for individuals, Chapter 7 or Chapter 13 bankruptcy. Filing for either of them will drop your credit score between 130 and 200 points. That can take an excellent credit score all the way down to the poor credit score category. Along with that, bankruptcy will show up on your credit reports between 10 to seven years, depending on the type of bankruptcy you file.
With a low credit score and a bankruptcy present on your credit report, securing a car loan or any loan will be challenging, as lenders will want as much financial protection as possible.
How Soon After Bankruptcy Does It Take for Credit To Recover on Its Own?
Although you cannot remove a bankruptcy from your credit report, it will drop from it eventually. In the meantime, though, you may see some improvement in your credit. It takes about 12 to 18 months for most people to see their credit improve on its own. This may largely be attributed to any debt payoff or discharge associated with bankruptcy.
However, this recovery may not be substantial and can still make it hard to qualify for a car loan on your own. The good news is that there are things you can do on your own to improve your credit score, more on that below.
Improving Your Credit To Qualify for a Car Loan After Bankruptcy
Improving your credit score after bankruptcy can definitely help increase your chances of getting an auto loan, even though it may take a few months. Here are some ways you can improve your credit while you wait for a credit score boost from a bankruptcy discharge:
Pay Your Bills on Time
One of the most important things you can do for your credit after a bankruptcy filing is to pay your bills on time. On-time payment for any of your credit accounts can help boost your credit score over time.
Keep Debt Low
Your credit utilization ratio will directly affect your credit rating. Your credit utilization is the ratio between the amount of debt you have versus your available credit. Keeping that ratio under 30% will be helpful to your credit. Another thing to remember is that every time you apply for a new loan or credit card, that hard credit inquiry will hurt your credit score. One way to ensure that you don’t unintentionally hurt your credit is to keep your revolving credit accounts (i.e., credit cards) open even after paying them off.
Use Credit Builder Loan or Secured Credit Card
Having a lot of debt to pay can be bad for your credit, but you should have some debt to show your ability to handle monthly payments to prospective lenders. When working with a bad credit score, you can look into credit builder loans and secured credit cards. Although they may not mean tangible credit right away, both of these options can help you establish a payment history, which can help you qualify for a car loan.
Get Your Rent and Utilities Reported
Another way to build a payment history is to get your rent and utilities reported to all three credit bureaus. You can ask the respective company/person collecting that money to report it for you. And if that is not an option, there are third parties you can pay to get those payments reported to build credit history.
Can You Get a Car Loan Even With a Bad Credit Score?
Even with different credit repair strategies, getting to good credit can take months or even years. And if you need a car loan right away, you may wonder if getting one with a bad credit score is even possible. The good news is that there are options available. Here are some things to look into when trying to secure an auto loan after bankruptcy:
Get a Cosigner or Co-Borrower When Applying for Auto Loans
A cosigner and co-borrower can be a family member or friend with good credit that can help increase your chances of approval from a car loan. Additionally, you may be able to get a better interest rate and more flexible repayment terms. A cosigner is only responsible for paying the loan if you cannot make monthly payments. While a co-borrower co-owns the vehicle and will make loan payments with you—the car loan will then be considered a joint auto loan.
With a cosigner, anything you do will affect their credit scores. Co-borrowing is a little different, as both parties’ actions will affect each other’s credit. And so, really consider the repercussions of a joint auto loan or a cosigner before adding either one to your auto loan application.
Talk To Different Lenders About Auto Financing
Most people start their search for a car loan with a bank or credit union. However, online lenders and car dealerships also provide auto loans. Some lenders are more flexible than others. For example, your local credit union and bank may be less flexible with poor credit. You’ll likely find more options for bad credit car loans with car dealerships and online lenders. And so, be smart about the auto lenders you inquire with to get the best chance of loan approval after bankruptcy.
Increase Your Down Payment
Many car loan lenders, especially bad credit auto lenders, will require a down payment. The higher your down payment for the loan, the less you have to finance, increasing your chances of approval. If you don’t have the money for a down payment right away, consider taking some time to save or getting a part-time job.
If you cannot wait and need money immediately for your down payment, you can look into bad credit loan options like a bad credit personal loan. Although you may come across options like a pay day loan or title loan, try to avoid them, as they have high-interest rates.
Buy a Low Cost Car for a Smaller Loan
Another thing you can do to increase your chances of approval with a car loan is to look at a used car rather than a brand new one. In most cases, a new car will cost much more than a gently used one, even if it is the same make and model. You should also look at car brands with lower price points, even if that means waiting a few years to get your dream car. The lower the price of the vehicle, the less amount you need to qualify for with your auto loan, increasing your chances of approval!