Understanding Car Loans After Bankruptcy

With a little patience and research, it's possible to secure a car loan after bankruptcy.

Jacqueline DeMarco | 

Jun 24, 2022 | 4 min read

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Updated January 25, 2024

While it may seem out of reach, it's possible to secure a car loan after bankruptcy. Buying a car post-bankruptcy could feel like a luxury, but having a functioning vehicle may be necessary for your work or family.

If a car is something you need in this new chapter of your life, consider these tips for car loans after bankruptcy and how to qualify for one.

How to Qualify for a Car Loan After Bankruptcy

Qualifying for a car loan after bankruptcy is doable, but it can take a little more work than buying a car when in good financial standing. The key to qualifying for a car loan after bankruptcy is to improve your credit score and save for a solid down payment.

Improve your credit score

To improve your credit score:

• Start making on-time payments for any current sources of debt
• Keep your credit utilization ratio low
• Ensure you have a healthy mix of credit products you can manage responsibly

It may take time to give your credit score a boost, but once it's in a good place, it's much easier to qualify for lending products and secure lower interest rates. Because bankruptcy can impact your credit score, now is a good time to review your credit report for any errors you can have removed. Thanks to the Fair Credit Reporting Act, you're entitled to receive a free copy of your credit report from each main credit bureau (Experian, TransUnion, and Equifax) once every 12 months.

Save for a down payment

Your financial situation may make saving for a down payment a bit tricky, but putting as much as 10% or more down on a car can make it easier to obtain an auto loan and get good interest rates.

How Long Do You Have to Wait to Buy a Car After Bankruptcy

If you're currently in the midst of bankruptcy proceedings, the type of bankruptcy you filed can affect how long you have to wait before buying a car.

• Chapter 7 bankruptcy: With this type of bankruptcy, it can be helpful to wait until the process is finalized to buy a car — acquiring assets during the proceedings can be considered fraud. It can take four to six months to complete Chapter 7 bankruptcy.
• Chapter 13 bankruptcy: With some lenders, it may be possible to finance a vehicl while in Chapter 13 bankruptcy, as long as you continue to make your Chapter 13 payments (this type of bankruptcy involves a payment plan). You'll need permission from the court to finance a car during the proceedings, but once you're finished, you won't need its permission.

Other Factors to Consider When Applying for Loans After Bankruptcy

Bankruptcy can have a significant effect on various parts of the car-buying process. There are a few factors you should consider:

Interest rates

Shopping around for the right auto loan after filing for bankruptcy is important. Because of your financial situation, you'll likely encounter high interest rates. You may want to compare different lenders so you can find the best interest rate possible.

Car choices

In addition to shopping around for the right loan, you may want to spend time shopping for the right car. Choosing a lower-priced car can make it easier to put down a larger down payment, which could help you qualify for a better auto loan.

A Cosigner

If your credit score is limiting your lending options, you might consider asking a trusted family member or friend with good credit to act as a cosigner. A cosigner can make it easier to qualify for an auto loan, but be careful. If you fail to make your car payments on time, your cosigner will be held responsible for paying them. If neither of you makes the payments, both of your credit scores will suffer.

Lending sources

If you're looking for a car loan, it can be helpful to start at local banks and credit unions, which tend to have more lenient lending requirements—especially if you have an existing relationship with an institution. You'll want to watch out for any car loans after bankruptcy that are predatory toward people in difficult financial situations, and that charge extremely high interest rates and fees.

Patience is key

When it comes to finding a car loan after bankruptcy, remember that it can take time to build your credit check and save a down payment. It can also take time to find the right car and lender. Be patient while making these important decisions as you start to rebuild your financial life.

Jacqueline DeMarco

I’m a freelance writer based in Southern California who graduated from the University of California Irvine (UCI) with a degree in Literary Journalism and Digital Art. Through my studies, I learned how to combine journalistic style research with a touch of creativity. Today I create content that touches a variety of different subjects, but all work toward the same goal — to provide valuable resources to readers looking for answers to their trickiest questions.