Yes, you can get an auto loan or auto loan refinance after bankruptcy, though it may be more challenging. While filing for bankruptcy may be the best decision for people in certain circumstances, it does come with long-term consequences. Both your finances and your credit score are likely to suffer.
Whether you’re just starting or are in the recovery process, it is best to learn about the options surrounding how to get an auto loan after bankruptcy.
Key Points
• You can get an auto loan after bankruptcy, but eligibility depends on the type of bankruptcy, discharge status, and time elapsed since the filing.
• Bankruptcy significantly lowers your credit score, making it harder to secure favorable loan terms. However, rebuilding credit over time can improve your chances.
• Subprime lenders often offer auto loans to individuals with poor credit, though these loans may come with higher interest rates and stricter terms.
• Ways to get a car loan after bankruptcy include rebuilding your credit, applying with a cosigner, purchasing a cheaper car, or simply waiting until you’ve saved enough money.
• Securing an auto loan after bankruptcy can be a step toward rebuilding your credit, provided you make timely payments and manage your finances responsibly.
Chapter 7 vs. Chapter 13 Bankruptcy
The type of bankruptcy you undertake can have a big effect on how your existing car is handled. Some people hesitate between debt settlement vs. bankruptcy. Once you’ve chosen bankruptcy, it’s important to pick the right kind.
How Chapter 7 Works
Chapter 7 bankruptcy, also called liquidation bankruptcy, poses the most risk to your vehicle because it involves liquidating your assets to pay your creditors.
Basically, to be eligible for a Chapter 7 bankruptcy, you must show that you can’t reasonably pay off your debts with your disposable income. At that point, your nonexempt property (which might include bank accounts, valuable jewelry, or a second car, among other things) may be sold to pay off your debts, though you will be allowed to keep certain necessities, which are classified as “exempt.” In some cases, you may be able to get an exemption to keep your car if you have some equity in it. Exemption rules vary by state.
How Chapter 13 Works
Chapter 13 is a reorganizing plan that lets you keep your car (and your house), but you’ll be on a court-ordered repayment plan for three to five years. To be eligible for Chapter 13 (also called a reorganization bankruptcy), you must have a regular income and you can’t owe more than a certain amount of debt (as of 2024, the limit is $465,275 in unsecured debt or $1,395,875 in secured debt).
No matter which option you choose, it’s advisable to speak with an attorney and get your questions answered about what to do before declaring bankruptcy.
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How Does Bankruptcy Affect an Auto Loan?
You may be wondering how long after bankruptcy can you buy a car. Another question is what to do if you have a car, and a car loan, while you go through bankruptcy.
With a Chapter 7 bankruptcy, if you have a car loan (or your equity is considered nonexempt), then you have a few options. Because the loan is secured by the vehicle, you’ll need to keep up with your payments in order to keep the car. You may need to sign a reaffirmation agreement and outline your plan for affording the monthly payments.
Otherwise, you can either surrender the car or redeem it when you’re in Chapter 7. By surrendering, you remove your liability for the debt, but the car will be repossessed by your creditor. By redeeming your car, you agree to pay a lump sum of the car’s market value rather than the remaining loan amount — and you get to keep the car.
In a Chapter 13 bankruptcy, the court will appoint a trustee and you’ll make monthly payments as determined by the court’s payment plan to the trustee, who will make payments to your creditors. You can add your car loan to the repayment plan. This could give you a chance to catch up on any payments you may have missed leading up to your bankruptcy.
Bear in mind that if you decide to buy a car while you’re in a Chapter 13 bankruptcy, you will need to get the court’s permission.
Car Loans vs. Liens
A loan is not the same thing as a lien. If you are taking out a loan to purchase a car, a lender wants to make sure they are protected if you default. In order for them to receive that protection, they use car liens. The car you purchase has a lien on the title until you’ve completely paid off the car.
Considerations With Auto Loans After Bankruptcy
A major issue with a bankruptcy car loan is your credit score.
A chapter 7 bankruptcy stays on your credit report for 10 years, and a chapter 13 stays on it for seven years (since, in the latter case, you partially repay some of your debt).
Once the bankruptcy hits your credit report, your credit score could drop. Someone with a 680 score could lose between 130 and 150 points, while a person with a score of 780 might see their score drop between 200 and 240 points, depending on a number of variables, including your credit score prior to filing and how many accounts were included in the bankruptcy.
Can You Get a Car Loan During Bankruptcy?
Getting a car loan after bankruptcy can come with challenges beyond the impact to your credit score. Lenders generally view applicants with a bankruptcy as high-risk because there’s a history of non-payment to other creditors.
While there are lenders who focus on subprime borrowers, expect extremely high interest rates to compensate for the risk.
Pre-planning to Get Approved for a Car Loan After Bankruptcy
You can prepare yourself for applying for auto loans after bankruptcy in a number of ways.
4 Ideas That Could Help With Car Loan Approval After Bankruptcy
Here are four ideas to help your cause:
1. Rebuilding Credit First
One possible route is to start working to rebuild your credit as soon as possible.
Banks typically require a minimum credit score of 600 to give an auto loan without any down payment. However, it’s possible to buy a car with credit in the 500s — be aware the interest rate will most likely be high.
2. Finding a Cosigner
You could consider getting a cosigner with good credit, if possible. This does mean that your cosigner shares equal responsibility for the loan, but you’ll likely have better odds of getting approved.
3. Finding a Cheaper Car
It’s a good idea to keep your potential auto loan as low as possible. In addition to saving up for a sizable down payment, consider focusing on lower-priced vehicles as one way to potentially improve your chances of getting approved.
4. Wait and Save
Another strategy that may help you get approved for a car loan after bankruptcy is to save up for a large down payment. This lowers the lender’s risk and might therefore help lower your interest rate and your monthly payment.
Where to Find Auto Loans After Bankruptcy
There are many potential sources for after-bankruptcy auto loans. Comparing multiple auto loans after bankruptcy can help ensure that you’re getting the best deal possible for your financial situation. Lenders’ rates and terms can vary significantly, so take the time to shop around.
A local bank or credit union may have more flexible lending requirements to help you qualify, especially if you have a relationship with it already.
Beware of predatory lenders with exorbitant fees and interest rates. Financing companies that advertise “no credit check,” “guaranteed financing” and “buy here, pay here” are to be approached with caution.
Alternative to Auto Loan Bankruptcy
Voluntary Repossession
Surrendering your car is an option for a car loan in a Chapter 7 bankruptcy. Voluntary repossession is a course of action. If you surrender your car, your creditor will repossess the vehicle and the car loan balance, and any deficiency balance will be erased as part of your bankruptcy discharge.
Can You Refinance Your Car After Bankruptcy?
A bankruptcy can impact your ability to refinance an existing car loan just as it can affect taking out a new one since your credit history is a primary factor in both applications. That doesn’t mean it’s impossible to get approval for after bankruptcy car loans. And you may still be able to save on your interest rate.
Figuring out how to refinance an auto loan after bankruptcy involves many of the same challenges as buying a new car. Compare offers from online lenders and local financial institutions to find the best deal for you.
Refinancing a car can cost money, typically in the form of lender fees and title fees. While the amounts may not be huge (especially if you’re saving on interest), they can add up, especially if you try to refinance your car loan multiple times.
The Takeaway
It may be harder to get an auto loan after bankruptcy, but it doesn’t have to be impossible. And the process itself isn’t all that different from the one you would use if you hadn’t gone through a bankruptcy. Consider budgeting not only for a down payment, but also to look longer and harder for an acceptable interest rate. Use an auto loan calculator to see specifics.
Comparing auto loan refinancing rates after bankruptcy can help improve your odds of getting approved and help you find the best offer. You can use Lantern by SoFi to access multiple lender offers at once.
If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.
FAQ
Can you get approved for an auto loan after applying for bankruptcy?
Yes, but typically the more time has passed since your bankruptcy, the better. This gives you time to work on rebuilding your credit, which can eventually help you get approved for more favorable terms. Additionally, the impact of bankruptcy on your credit score usually lessens over time with responsible financial decisions, even if it’s still listed on your report.
What do you need to do to qualify for an auto loan after bankruptcy?
A larger down payment can help you qualify for a car loan after bankruptcy. It may also be helpful to apply with a co-signer with a good credit score.
How hard is it to be approved for an auto loan after bankruptcy?
It can be difficult to get approved for an auto loan after bankruptcy, but not impossible. Look for lenders that specialize in working with borrowers who have a bankruptcy on their credit report. You can search online and also check with local banks and credit unions.
Should you refinance a car after bankruptcy?
Refinancing your car loan only makes sense if it will save you money in interest or help you afford the monthly payments to avoid default. When searching for refinance offers, evaluate the interest rate and fees, as well as the length of the term. A lower rate saves you money over the life of the loan, while a longer term lowers your monthly payment (although costs you more in interest over time).
Photo credit: iStock/Thai Noipho
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