One of the common concerns that people have when considering pursuing personal bankruptcy is whether they will be able to get approved for a new loan in the future. In fact, many people put off bankruptcy when it is their best option out of concern for this issue, but the truth is often just the opposite. While there is a lull in the ability to get approved for loans and credit in the immediate aftermath of bankruptcy, lenders are more than willing to lend money to people who have declared bankruptcy or have been discharged from bankruptcy in the past
Why would a lender give money to someone who had to declare bankruptcy to get out of previous financial struggles? There are three primary reasons, including the ability of a lender to garner more favourable terms. The lack of debt load for the recently bankrupt, and the consumer’s improvement in financial responsibility post-bankruptcy.
Can You Get a Loan After Bankruptcy?
Getting approval for a loan requires a lot of research, documentation, and decent credit history. Add bankruptcy to the mix, and finding approval for a loan becomes even more difficult, as you will have a harder time qualifying. Experts recommend that you wait to build back your credit after bankruptcy before applying for a loan. Failure to wait can result in higher interest rates and overall unattractive loan terms. Banks will be unlikely to lend to you, but you may have some luck with private lenders, who may accept you as a risky client in exchange for skyrocketed interest rates.
How to Get More Favourable Loan Terms?
Even if you do receive approval for a loan after bankruptcy, it’s almost a guarantee that the terms will not be favourable. You might be faced with high-interest rates, increased penalties for late payments, and a short-term length. Here are some ways to obtain more favourable loan terms after bankruptcy:
Rebuild Your Credit
Building back your credit after bankruptcy takes time, but it’s not impossible.
Get a Secured Credit Card
After bankruptcy, it’s unlikely that you’ll be approved for an unsecured credit card. Secured credit cards function similarly to unsecured cards, but they require a security deposit. For example, if you put in a $1,000 security deposit on a secured credit card, you’ll be approved for a $1,000 credit limit. Secured credit card issuers are not as concerned with your credit score when approving you as the debt is backed up by your security deposit. As you make purchases and timely payments on the card, your credit history is reported to the credit bureaus, helping you build back some of your credit.
Credit Builder Loan
Credit builder loans are loans that function to improve your credit. Suitable for those with bad credit, or those with no credit history like newcomers, credit builder loans help you increase your credit score with the goal of making you eligible for more credit cards and loans. Requirements are minimal for these loans, as lenders only want to see that you have enough income to support your monthly payments.
A credit builder loan requires you to open up a bank account and make monthly payments into that account on time. These payments are deposited every month until the term length is complete, which can range from 6-24 months. Lenders still charge you interest and fees, however.
At the end of the term, you receive all of your money back (minus any fees charged), and your monthly payments are reported to the credit bureaus. With credit builder loans, it’s best to keep your monthly payments exact, and not go over. Your goal is to have a solid history of monthly payments for the credit bureau, and paying off the loan in full, or faster, defeats your purpose.
Check out these credit building services in Canada.
Some people who declare bankruptcy are able to have their debt discharged, though that is not necessarily the case for everyone. Whether or not someone’s debt is discharged (forgiven) or simply restructured depends on a host of factors, such as the person’s ability to repay and the amount of debt. In either case, the monthly payment and debt responsibility for someone who declared bankruptcy in the previous two to five years is much less than before the declaration. That means that lenders are more likely to receive their full payment on time each month because the lender is not competing with others to whom the person owes money. The chances of getting repaid then become much higher, making someone with a bankruptcy on his or her record a more desirable customer.
Time is your friend when it comes to financially recovering from bankruptcy. Building credit doesn’t happen overnight – a steady history of repaying debts will help you build back your credit. Additionally, the older your bankruptcy date is, the better. If a few years have passed since the bankruptcy (as opposed to a few weeks), you may seem more reliable to a lender.
Where Can You Get a Loan After Bankruptcy?
Bank loans are likely unattainable after a bankruptcy. If you want to secure a loan, you are most likely going to have to rely on alternative lenders.
Alternative lenders are private, and not associated with traditional banks. They can either be a business, an independent person lending, or a fintech (financial technology) company offering lending services online. While banks place a lot of emphasis on your credit score in assessing your reliability, alternative lenders balance their approval on other factors, including income, job stability, capital, and debt to income ratio when deciding whether or not they want to lend to you.
Keep in mind, however, that alternative lenders offer loans that have higher interest rates to offset the risk of a borrower with unfavourable credit.
How to Get a Loan After Bankruptcy?
As discussed above, a secured credit card is a great way to get your feet wet with credit after bankruptcy. After enough time has passed and you have a solid number of payments that have been recorded with the credit bureau, you might begin to consider unsecured credit cards. Make sure you start off small and only take out enough credit that you can financially manage. You want to avoid going backward in your credit-building journey – racking up more debt on your credit card will only hold you back from bankruptcy recovery.
Getting a mortgage after bankruptcy can be difficult. Luckily, there are a few factors that lenders consider that may persuade them into lending you a mortgage:
Bankruptcy Discharged For at Least Two Years
Bankruptcy discharge occurs when the borrower in question has been legally released from their debt obligations, with a couple of exceptions. You are automatically discharged from bankruptcy nine months after filing, provided that the following criteria are met:
- This was your first bankruptcy
- You’ve attended two financial counselling sessions, standardized by the Office of the Superintendent of Bankruptcy
- No creditors are opposing the discharge
Most mortgage lenders will want to see that at least 2 years have passed since you were discharged from bankruptcy.
Check out what documents you’ll need to get a mortgage.
Access to New Credit
You’ll want to show that other lenders have approved credit in your name. This can be a variety of loans, including a car loan, unsecured or secured credit card. A lender is more likely to give you a mortgage if they can see you already managing new credit responsibly.
Better Credit Score
Mortgage lenders will need to see an improved credit score since you filed for bankruptcy.
High Down Payment
Since your bankruptcy poses more risk for a lender to give you a loan, it would help to have a higher than usual down payment for your property.
Like a mortgage, it will be harder for you to be approved for a personal loan after bankruptcy. Your best bet for a lender would be an alternative lender, who will look past poor credit in exchange for any of the following conditions on the loan:
Car loans are relatively attainable after a bankruptcy, as many dealerships provide financing to people with less-than-stellar credit, some of which resulting from bankruptcy. You’ll need to accept, however, that your term and interest rates will be different than what you would have been offered pre-bankruptcy. Be prepared to face higher interest rates with your car loan, but don’t fret – after you spend some time building your credit, you’ll likely be able to refinance your car loan.
How long will bankruptcy remain on my credit report?
Can I get a mortgage after bankruptcy?
What’s a good secured credit card?
Gaining Perspective on Debt
While there are consumers who go through bankruptcy and seem to learn little, there are others who do gain perspective on their financial problems. Some may learn how to budget better or even get professional advice on avoiding financial problems in the future. These steps mean that people who have declared bankruptcy often become more responsible, a win-win for the borrower and lender.
If you’ve recently been discharged from bankruptcy and are looking to apply for a loan, Loans Canada can match you with a lender who can help you.
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