Bankruptcy offers Canadians the opportunity to handle extreme debt and get a fresh start, free of their creditors. It does, however, come at a cost. After your bankruptcy is discharged, it remains on your credit profile for at least six years (for a first bankruptcy). As a result, it becomes a unique challenge to regrow credit and access new loans and credit after bankruptcy.
Despite this difficulty, the need for a car to commute and get to work remains the same. If this describes you, then the most important step is doing thorough research. That way you know what to expect when pursuing a car loan after bankruptcy.
Can You Get a Car Loan After Bankruptcy?
The good news is that you can get a car loan after bankruptcy without waiting the full six years for it to be removed from your credit report Actually, when you are in the process of waiting for your bankruptcy to no longer appear on your credit report, you can take steps to rebuild your credit. The best way is to prove that you repay loans on time, every time. Because of the size of a car loan, it can help you grow your credit in a quite substantial way.
Getting A Car Loan After Bankruptcy
To get a car loan during bankruptcy, you will need some sort of collateral. Since all of your finances will be governed by a Licensed Insolvency Trustee, this will depend on your situation. However, after your bankruptcy no longer appears on your credit report, you may be able to get a car. However, your approval will depend on your finances and how well you’ve been rebuilding your credit.
Where Can You Get a Car Loan After Bankruptcy?
After bankruptcy, you can access a car loan through alternative lenders. It is important to remember that, resulting from the damaged credit score and the bankruptcy on your file, you won’t be able to access premium terms. Alternative lenders have higher interest rates, resulting in larger payment amounts. So long as you manage your payments and ensure that you can afford them, a loan will give you access to a vehicle while enabling you to improve your credit.
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Pros and Cons of Getting a Car Loan After Bankruptcy
Before getting a car loan after bankruptcy, it is important to assess the pros and cons.
Pros
- Building your credit score: After filing for bankruptcy, your credit will be severely damaged. The only way to repair this is to access credit and use it to rebuild your score. When you make your scheduled car payments in full, you can efficiently rebuild your credit score. If you want to track your credit after bankruptcy, you can do so for free using Loans Canada’s Compare Hub.
- Affordable payments: While alternative lenders tend to have higher rates of interest than major banks, you can get a loan with a term that’s longer. Which means that you will have lower regular payments.
- Owning the vehicle: Another advantage of car loans is that, once it is paid off, you will own the vehicle. This means the car becomes an asset held under your name. And, paired with your improved credit score, can be very helpful in reaching your next financial goal.
Cons
- Higher interest and fees: You’ll only be able to access a car loan through an alternative lender after bankruptcy. The loan will naturally have a higher rate of interest and more substantial fees. In order to balance the risk of lending to someone with bankruptcy on file, alternative lenders charge more. While you can make arrangements for an amenable payment schedule and amount, you will end up paying more for the vehicle over time.
- Higher debt levels: Though proving your ability to make responsible payment is important to growing your credit, having a high debt-to-income ratio can be a barrier to other loans and financial services. When you take out a car loan, naturally it increases your debt. Consider carefully if this is something for which you are prepared.
- Investing in a depreciating asset: Lastly, consider the fact that, while a vehicle is technically an asset, cars are notorious for rapid depreciation. That said, this is true of vehicles regardless of what kind of car loan you’re getting. However, if you plan to use it to leverage a different loan in the future, be sure to consider what the real value will be at that time. It may be a better decision to buy a pre-owned, more affordable vehicle considering the speed of depreciation on this type of asset.
How To Boost Your Odds of Getting a Car Loan After Bankruptcy?
Pursuing a loan with post-bankruptcy credit can be a stressful process. There are some steps you can take to boost your chances of getting a car loan.
Improving your credit score
The first thing you can do is to improve your credit as much as possible before applying for a car loan. A proven method is to get a secured credit card. Unlike unsecured cards, you place money down which is effectively held as collateral against the credit account. As a result, even those with poor credit can access a secured card. Otherwise, it works just like a regular credit card and can be used to grow your credit score.
Save for a down payment
The higher the downpayment you apply, the better your loan terms will be. Having more to pay upfront makes you a lower risk investment for the lender and thus can help improve your odds of getting a car loan after bankruptcy.
Decrease your debt
When you have more debt, it makes you a riskier borrower; so, naturally, you want to take steps to reduce your debt. If you have any other loans, pay them down as much as possible. A lower debt-to-income ratio makes you a much more desirable borrower.
Compare rates
In order to be sure that you are getting the best rate possible, it’s important to do thorough research. Consult a loan comparison platform to get specific quotes on car loans. Not only will it give you an idea of what to expect, but it can also highlight lenders you may not have otherwise considered.
Find the right lender
There are lenders out there who work specifically with those who’ve gone through the bankruptcy process or who have bad credit. Use the loan comparison site to identify alternative lenders who will be willing to lend to you (and offer reasonable terms). Even if the lender doesn’t specifically work with those who’ve gone through the bankruptcy process, they may be the right fit when you look at the loan terms they offer.
Be Careful of Falling Back Into Debt
The final step is very important. You need to take measures to protect yourself from falling back into a vicious cycle of debt. When you’re looking for a vehicle, especially for work reasons, it can be a very stressful process with a feeling of urgency. Unfortunately, there are predatory lenders who prey on vulnerable lenders. To mitigate this risk, be sure to do thorough research on the options which are available.
A good approach is to wait to finance until you have rebuilt your credit. Use the mechanisms available to you, such as secured cards, and pay down your debt before taking on any more. Finally, it is important to budget for the real cost of the car (over and above the loan). Consider the expenses including maintenance, insurance, registration, and fuel. Have a realistic budget so that you know what to expect in terms of the actual cost.
Construct a detailed budget that considers your income and expenses. Factor in the projected expense of the vehicle and determine whether getting a loan is the right way to go. You can make adjustments to your situation by improving your credit (to get a better interest rate). Alternatively, you can pursue a lower loan amount by adjusting the price range of the car you’re seeking.
How To Avoid Losing Your Car In Bankruptcy?
You may be able to avoid having your car repossessed when in bankruptcy by paying the difference between its current value and the allowable limit. For example, if your car is appraised at $8,000 and you live in Ontario that allows a maximum of $7,117, the difference is $883.
You can pay your trustee this difference, which would then be added to the fund pool that is eventually distributed amongst your creditors. In this case, you can then keep your car.
But if you are unable or unwilling to pay this difference, you’ll need to give up your car to your trustee. The car will then be sold, and the proceeds of the sale would be distributed amongst your creditors.
If the car sells for less than what you still owe on your car loan, you’ll owe the remaining balance. But this would then be considered unsecured debt and could be included in your bankruptcy if all this occurred prior to declaring bankruptcy.
You Still Owe An Outstanding Balance On A Car Loan
If you still have an outstanding balance on your car loan, you may be able to keep the car, depending if the outstanding debt is considered secured or unsecured. Bankruptcy in Canada deals with unsecured debts. So, if the car is serving as security for a loan, it is exempt from bankruptcy.
But if the lender has a lien on the title and has a claim against the car, they may be able to seize it if they can prove their rights to it. If they’re successful, your trustee will release the vehicle to the creditor.
If you owe a lot more than the market value of the car or you can’t afford to continue making payments, you can surrender the car and the shortfall debt will be included in the bankruptcy.
What If Your Car Is Leased?
If you have a leased vehicle in bankruptcy, there’s a chance you can still keep the car, as long as you continue to make lease payments. Alternatively, you may also include the lease debt in your bankruptcy and give up the car to your trustee.
Final Thoughts
Accessing a car loan after bankruptcy requires a substantial amount of prudence in terms of research and execution. Balance the benefits of having access to a vehicle with the risk of increasing your debt. There are ways to responsibly approach loans to mitigate risk and improve your quality of life. So long as you take your time, learn all about your options and are fully prepared, you can find loan terms that work for you both today and in the future.
