Declaring bankruptcy is traditionally seen as the surest way to convince lenders to steer clear. But the idea that it ends any hopes of securing a future loan is not quite right, and even before the usual 2-year term of the bankruptcy ends, there are options. Getting a car loan after bankruptcy, for example, is not that difficult.
As with all financial matters, there are conditions and criteria to satisfy before approval can be granted, but the fact remains that an opportunity to buy a new car is available to bankruptees. But what is needed in order to secure loan approval despite bankruptcy?
Well, the lenders are obviously accepting a higher degree of risk than usual, so there are some special conditions involved, as well as higher interest rates. But the car loan can be secured as long as the affordability factor is proven and a means of repaying the loan is assured.
Whenever someone applies for a loan, the lender is always more interested in establishing that the repayments are affordable to them than what their credit history is like. There are 2 parts to establishing affordability: the income and the debt-to-income ratio of the applicant. Getting a car loan after bankruptcy depends to these matters too.
Income relates to employment, and applicants must have a full-time job before they will be considered for approval despite bankruptcy. The income itself needs to be sufficient too, but the employment stability is perhaps more important. So, recently hired people (within 3 months) are likely to be overlooked.
The debt-to-income ratio relates to excess income, or the existing monthly expenditure compared to the monthly income. The ratio stipulates a maximum 40% of income be spent on debt repayment, so the car loan repayments must fall within a tight limit. If it does not, then the application will be rejected.
Finding The Best Deal
Admittedly, not every lender is willing to grant loans to recent bankruptees, and many of those that do fail to offer affordable terms charge interest rates that are very high, or have loan limits that are very low. However, online lenders tend to cater to the niche, and chiefly offer affordable car loans after bankruptcy.
Of course, we can rule out securing a new Porsche, as the scope of any such loan has to be confined to what is not going to cause major financial pressure. But it is not unreasonable to expect to get approval, despite bankruptcy, on a loan of $20,000, if the repayments are within budget.
But while online lenders may offer attractive deals, be sure to read the small print in any car loan contract before signing it. And check out the reputation of the lender on either the BBB website or through the Verify1st security tool.
Helping To Get Approved
Getting a car loan after bankruptcy is an opportunity to rebuild your credit reputation, so there can be a certain amount of pressure to secure approval. There are a few things to do, to help that cause.
The most practical is to include a cosigner in the application – someone who is willing to act as guarantor for the loan. The lender will be happy with the extra security on the loan, and will lower the interest rate. However, they will only accept the nominated cosigner if he has an excellent credit history and a large income.
Another way to help secure loan approval despite bankruptcy is to offer a down payment on the car. This effectively means that the size of the car loan is reduced. A 20% down payment on a $15,000 car would lower the required loan to $12,000.