While many traditional auto lenders may be hesitant to work with bankruptcy borrowers, you probably have more lending options than you think. Dealers don’t necessarily care too much about whether or not you’ve gone through bankruptcy, since they’re typically not the ones who approve you for car loans.
Car Dealers and Bankruptcy Auto Loans
Most often, the auto lender is the one that cares about your credit reports and whether or not you’ve gone through a bankruptcy, as they’re the ones that approve or deny you for a car loan. The dealerships are usually only concerned with selling you a vehicle.
Many dealers are signed up with third-party lenders, and some have lenders that assist bankruptcy borrowers. Not every dealership has these lending resources, but we can give you some guidance.
There are three main lending options for borrowers in bankruptcy situations:
- Credit union
- Special finance dealership
- Buy here pay here (BHPH) dealership
Banks and credit unions offer what are called direct auto loans, and they’re considered traditional lenders. They work with you directly and have varying credit requirements – some more strict than others.
Credit unions are typically more lenient than banks because they’re member-owned. However, with a bankruptcy on your credit reports, it can still be hard to qualify. But if you’re a long-standing member of a credit union, and you have a good history with them, they may be willing to finance you.
When you get approved for a direct car loan from a credit union, it's typically considered a pre-approval, and you can take that right to a dealership and shop like a cash buyer. Your bankruptcy doesn’t matter to the dealer, since you’ve got that pre-approval in your hands from a lender, and you’re ready for a vehicle.
Special Finance Dealership
Most dealerships are signed up with third-party lenders to finance borrowers, and the ones with bad credit lending resources are called special finance dealers. These dealerships are unique in that they've teamed up with lenders that consider more than just your credit reports when you apply for auto financing.
At the dealer, there’s a special finance manager that acts as the middleman between you and the lender. You don’t actually meet the lender, but they look at all your information – your credit reports, check stubs, residency and job stability – and require a down payment. If you qualify for financing, you work with the car dealership to choose a vehicle and finalize your contract.
BHPH dealers are unique because they’re also your lender, unlike traditional dealerships. This is called in-house financing. In this situation, the dealer would be the one that’s looking at your credit reports because they handle the financing and the car buying, but they usually don’t review your credit reports. This means your bankruptcy may not matter to the dealership, since they’re not using your credit history to determine your ability to get an auto loan.
In-house financing is a common way for borrowers to get a car loan after bankruptcy, and other borrowers with damaged credit.
While the lack of a credit check is appealing to many bankruptcy borrowers, there are some trade-offs. BHPH dealers usually assign higher than average interest rates, and may require a down payment that’s around 20% of the vehicle’s selling price. Since these dealerships don’t reference your credit reports, the loan also may not be reported to the credit bureaus. If credit repair is important to you, be sure to check with the dealer’s reporting practices before you sign the paperwork.
If your bankruptcy didn’t end so well, or you have heavy damage on your credit reports, a BHPH dealership could be the way you get your next car.
How Did Your Bankruptcy End?
How your bankruptcy ended, or how it’s going, influences how you approach your next auto loan and what lending options you’re likely to have.
- Discharged. If everything went as planned with your bankruptcy and it was discharged, then you could have a chance at financing with all three lending options above. After you’re discharged from bankruptcy, you can usually get into a car loan right away.
- Dismissed with prejudice. If your bankruptcy was dismissed with prejudice, you may only have a shot with a BHPH dealer. Dismissed with prejudice means something went awry during your bankruptcy, and you may not be able to work with most auto lenders until that damage has healed on your credit reports.
- Dismissed without prejudice. If your bankruptcy was dismissed without prejudice, it typically means that there were some clerical errors or you just forgot to submit something. You can usually try to re-apply to resolve the problem.
- Still in Chapter 7 bankruptcy. If you’re still in the middle of your Chapter 7 bankruptcy, it may be a better idea to wait until it’s over to apply for a car loan. Many lenders don’t approve borrowers in an open Chapter 7. Since this bankruptcy is so short, usually lasting around four to six months, consider waiting until it’s discharged to try for an auto loan.
- Still in Chapter 13 bankruptcy. A Chapter 13 bankruptcy lasts for years, and a lot can happen during that time. If you need a vehicle during Chapter 13, there are processes in place to get a car loan with court permission. Direct lenders aren’t likely to work with a borrower in an open Chapter 13, but subprime auto lenders and BHPH dealerships may be willing to finance you in this situation.
Ready to Find a Car Dealer?
Now that you know which routes you can take based on your personal bankruptcy situation, it’s time to find a dealer to work with. This can sometimes be easier said than done, but we’ve crafted a way to find the bankruptcy lending resources many borrowers need here at Auto Credit Express.
We’ve gathered a nationwide network of dealerships that deal with bankruptcies. To get matched to a car dealer in your area that has the lending options you need for your next auto loan, fill out our car loan request form and we’ll do the looking for you. There’s never any obligation, and our form is completely free and secure. Get started today!