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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, earn money, and drive children to and from school and activities remains the same. If this describes you, then the most important step is doing thorough research so 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 profile. 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 will be able to get a car loan through almost any lender. Just keep in mind that your credit will likely still be low so banks and other traditional lenders may not want to approve you.
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
In order to determine whether getting a car loan subsequent to your bankruptcy, it is important to assess the pros and cons of taking on a car loan.
- 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 and at the predetermined time, you can efficiently rebuild your credit score.
- Affordable payments: While alternative lenders tend to have higher rates of interest than traditional lenders, like 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 free and clear. Not only does this mean you won’t have to continue with the regular payments, but it also means that you now have collateral for a future loan. 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.
- Higher interest and fees: Because you’ll only be able to access a car loan through an alternative lender, 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 a bankruptcy on file, alternative lenders charge more by using these means. 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.
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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.
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.
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