Banks That Work with Bankruptcies for Auto Loans

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Some lenders will not extend credit to someone with a bankruptcy on their credit report. Other lenders set a specific length of time to consider a loan application after bankruptcy, such as one year. The type of bankruptcy case (Chapter 7 vs. Chapter 13) may be a factor some lenders use when reviewing a credit application.

Traditional banks tend to have lower interest rates for car loans, but obtaining a loan with a low credit score or a bankruptcy on your record can be more difficult. Credit Unions are typically more willing to work with customers despite their financial history, and they may have lower interest rates than finance companies.

Using a traditional bank or credit union to obtain a car loan after bankruptcy is better. Many lenders use predatory lending practices to take advantage of borrowers needing a car loan. Examples include payday loans, title loans, “pay here” car dealers, credit cards, and online finance companies.

Filing for bankruptcy can be a step toward recovering from a financial crisis. Millions of people who experience debt problems get a fresh start by filing Chapter 7 or Chapter 13.

However, you might be concerned that if you file for bankruptcy, you will never qualify for a car loan, mortgage, or other credit. That is a bankruptcy myth lenders and creditors use to scare people away from bankruptcy relief.

Should You File Bankruptcy?

Are you in the research process and still unsure if you want to file bankruptcy or if it may be the right path for you? Check out our free “Should I File Bankruptcy Quiz” below. It gives you a breakdown and an estimate on every option; it is also an up-to-date quiz that provides you with an estimate of your qualifications if you wish to know if you could qualify for a Chapter 7 bankruptcy.

In this article:

  • We explore the types of banks that work with bankruptcies for auto loans.
  • We provide tips for obtaining an auto loan after bankruptcy.
  • Explain how to acquire a new vehicle loan if you are in bankruptcy.

Tips for Obtaining an Auto Loan After Bankruptcy

Cars do not last forever. You may need a more reliable car, or you had a car repoed after bankruptcy and need another vehicle.

If you need to purchase another vehicle after bankruptcy, here are tips for obtaining a car loan post-bankruptcy:

Rebuild Your Credit

Begin rebuilding your credit after bankruptcy by:

  • Make all payments on time, including loan payments, utilities, and other bills.
  • Ask a family member to add you to their credit card account so their good credit reflects on your credit report (NOTE: The downside is you become responsible for their debt if they don’t pay the bill.)
  • Apply for a secured credit card in your name. Charge small amounts and pay them off each month to build credit.
  • Obtain a credit builder loan through your credit union or bank to create a positive payment history.

Obtain copies of your credit reports from all three credit reporting bureaus (they are free here once a year). Check the reports for mistakes. Contact the creditor and the credit reporting company to correct errors immediately.

Be Honest

Tell the lender you have a bankruptcy on your record. If you filed because of a financial crisis, be transparent. For example, you were in a car crash caused by another driver and could not work for many months. You need to file bankruptcy to get back on your feet. Your credit report shows that you have made all payments on time since the bankruptcy ended and have a steady, current job.

Save a Down Payment

A down payment helps you obtain another car in a couple of ways. It lowers the amount you need for financing, lowering your car payments. A down payment could also make qualifying for a car loan easier after bankruptcy since you do not need to finance as much of the purchase price.

Speaking with Creditor About Goals

During your meeting with the lender, discuss your financial goals. Prepare a written budget showing that you can afford a car payment because you have reduced your debts through bankruptcy. You can explain your goal is to remain debt-free whenever possible and have an emergency fund in case a need arises so that you do not need to immediately look to using credit.

Choose a Recent Model Used Car Instead of a New Vehicle

You may want to search for good used cars that are five years old or under. You benefit from purchasing a vehicle under five years old because it should have many current safety features. However, the price is significantly lower because it is past the 20 to 30 percent depreciation that often occurs during the first year someone owns a new car.

Shop Around for Lenders

Take time to shop around for lenders when buying a car after bankruptcy. Compare interest rates and other terms. Pay close attention to late fees, origination fees, and other costs the lender charges. Always read the fine print to understand all fees and costs of the loan.

Apply for a Car Loan While in a Bankruptcy Case

It may be necessary to apply for a car loan while in a bankruptcy case. The chapter of bankruptcy you filed makes a difference in how you handle the matter.

If you filed Chapter 13, you must petition the court for approval to obtain a new car loan. Before filing a motion, you must take several steps, including choosing a car and obtaining pre-approval from a lender. The court must review the loan terms to ensure you can afford a car payment with your existing Chapter 13 plan. Discuss the need for a car loan with your bankruptcy attorney immediately. It could take a few weeks or months to obtain court approval.

It may be possible to qualify for a car loan in Chapter 7. However, it is usually better to wait until you receive your Chapter 7 discharge and the case is closed. Chapter 7 no-asset bankruptcies are usually completed within three to six months.

If you cannot wait until your Chapter 7 case ends, you may be able to get a loan after your 341 Meeting of Creditors. However, many lenders prefer not to enter loans with someone currently in a Chapter 7 case. If you find a lender willing to do so, obtaining the loan will likely cost you much more in interest and fees.

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