In the age of super high debt loads, with the average Canadian carrying over $22,000 in debt, bankruptcy remains one of the more misunderstood topics in Canadian personal finance. The confusion and myths surrounding bankruptcy in Canada remain in part because bankruptcy is still relatively rare. But that may be changing, as over 70% of members of the Canadian Association of Insolvency and Restructuring Professionals expect bankruptcy filings to rise over the next five years.
Whether you are going through bankruptcy now or considering it as a future course of action, it’s important to remember that people who experience bankruptcy aren’t consigned to financial ruin for life. Instead, bankruptcy is designed to help someone in financial trouble start fresh. Starting fresh means starting your life over, and for many Canadians, that could involve a post-bankruptcy car loan.
How Long to Wait Before Applying for a Post-Bankruptcy Car Loan
While bankruptcy will stay on your credit report for six years, you don’t have to wait that long before applying for new credit. In fact, during those six years, it’s important that you rebuild your credit by applying for and faithfully paying back credit of some kind (including loans). It’s unlikely that you’ll be approved for a car loan during bankruptcy without a significant asset to secure your loan, but after bankruptcy proceedings conclude, getting approved for a car loan is possible.
Finding Potential Lenders for a Car Loan After Bankruptcy
Finding the best car loan rates after bankruptcy is a little complicated. First, traditional lenders like banks may not be interested in lending you money for a car loan, or they may only do so at exorbitant interest rates. You can apply for a car loan through in-house financing from a dealership, but again, be prepared for higher interest rates.
While many dealerships will work with you to secure financing, especially if you can demonstrate that your income will support the payments, the amount they are willing to lend you may be less. For this reason, you should expect to finance a car valued at closer to $10,000 than, say, $50,000.
An alternative to in-house financing from a car dealership is working with a lending company that specializes in customers who are recovering from bankruptcy. These companies look beyond your credit score and do a deep dive into your financial situation. They weigh your income, recent payment history, credit score, down payment, and reasons for bankruptcy, and then offer you financing based on that information.
How to Increase Your Chances of Car Loan Approval after Bankruptcy
The first step to increase your chances of getting approved for a car loan is to increase your credit score. While your bankruptcy will remain on your credit report for six years, taking steps to build your credit score after bankruptcy does not go unnoticed. Here are some concrete steps you can take:
- Apply for a secured credit card, use it regularly, and diligently pay off the balance every month
- Never miss a payment on your utility bills
- Keep your credit utilization rate to less than 35% of your overall credit limit
- Avoid applying for several new sources of credit at once, which can temporarily decrease your credit score
On top of that, you should work to save up a decent down payment for your car loan. A large down payment demonstrates to your potential lenders that you have extra space in your budget for savings and car payments.
Finally, work to increase your income as much as possible. A good income will demonstrate to lenders that you can afford your monthly payments.
Be Wary of Predatory Loan Terms
Unfortunately, applying for any type of credit after bankruptcy is more complicated, and you may be turned down by several lenders. Due to the difficulty in obtaining credit, Canadians who have been through bankruptcy are a target for predatory lenders, and you need to be on the lookout for these companies that claim to offer good interest rates to those with bad credit, but don’t follow through. When evaluating a company as a potential lender, make sure to do your research and read online reviews and complaints carefully.
If you are offered car loan financing from a company that specializes in lending to Canadians who have been through bankruptcy, make sure to read through the fine print, every last bit of it. In particular, be on the lookout for high interest rates. While someone with stellar credit may qualify for a car loan rate from 0.00% to 6.00%, Loanconnect.ca reports that anyone with bad credit should expect to pay a rate as high as 30% to 60%. That may seem high, but payday lenders routinely lend money to customers with interest rates in the triple digits. Stay far away from loans with rates like these.
Other Factors to Consider When Applying for a Car Loan After Bankruptcy
Reading the Fine Print
Once you know the interest rate you may qualify for, pay special attention to the loan terms, especially payment frequency and whether you can refinance or pay off your loan early. It’s important to evaluate whether you can afford this loan, and the payment frequency will play a big role in determining this. Double check whether the payment for this loan is monthly, not biweekly or weekly, and that you can afford it at that frequency.
Refinancing and Early Payoff
On the same note, make sure that you can refinance this loan or pay it down ahead of schedule, because in a year or two, your credit rating may have improved enough that you can qualify for a much more competitive interest rate.
Finally, make sure that the car loan is reported to at least one of Canada’s credit reporting agencies, Equifax and Transunion. Not all dealerships report their financed loans to these credit agencies, but if you are making faithful payments on your car loan every month, you absolutely want that reported to the agencies so that you can improve your credit score as much as possible.
Finally, keep in mind that applying for a car loan after bankruptcy is difficult, but that difficulty is temporary. While you may have to downgrade your expectations now to afford your monthly payments with their hefty interest charges, if you continue to make your monthly payments faithfully, eventually your credit score will improve, and you’ll be on your way to a better financial situation.