Once your bankruptcy is discharged, not only is it a great relief, but you have a fresh start in the world of credit. However, you may have come out of this whole ordeal with battle scars on your credit reports, so here’s what you can expect when choosing between refinancing or another car loan.
Refinance or refinance?
If you have to keep your vehicle during bankruptcy, you may be considering refinancing since you are no longer under the aegis of the courts and the trustees. However, refinancing can be more difficult because your credit score has likely been damaged. Getting an auto loan can be a bit easier if you work with the right lenders.
Refinancing involves replacing your current auto loan with another, while keeping the same vehicle. Usually the main goal is to get a lower monthly payment. Auto finance is simply taking out another loan for a different car, and you can usually use your current vehicle as a down payment if you shop at a dealership.
If you are considering trading in your current car for another, or keeping your vehicle and reducing the payment, let’s get into the details so you can make an informed decision.
Most borrowers refinance to reduce their monthly loan payment. This is done either by lowering their interest rate or by extending the term of their loan (sometimes both). Having more disposable income each month is usually the primary motivation for borrowers looking to refinance.
To lower your car payment, the best option to save money is to take advantage of a lower interest rate. Since auto loans use simple interest, you are charged interest daily based on your loan balance. The longer you have the loan with a higher interest rate, the more you end up paying overall. If you just extend your loan, you will have to pay more interest, which will not save you money. Your payment might be lower each month, but you pay more in the long run.
A big advantage of refinancing over buying another vehicle is that refinancing usually doesn’t require a down payment. You can also keep your current car, as refinancing is simply replacing your loan with another, not replacing the entire vehicle.
Common Auto Loan Refinancing Requirements
Refinancing usually doesn’t require the best credit score to qualify, but it usually has to be good, or at least better than it was when you started the loan.
For many fresh out of bankruptcy borrowers, your credit score may be worse than it was when you first got the car loan. If this is the case for you, refinancing may not be in the cards right now. You will likely need to give your credit reports some time to heal before you can qualify for refinancing.
Other refinancing requirements typically include:
- Vehicle must be less than 10 years old and less than 100,000 miles
- The value of the car must be equal to or greater than the loan amount
- The loan must be at least one year old
- The loan amount cannot be too big or too small depending on the lender’s thresholds
If you meet these conditions, you may be eligible for refinancing after bankruptcy.
Broken auto loans
Taking out a car loan after discharging your bankruptcy may be easier than you think. Many bad credit lenders are prepared to finance borrowers who have gone bankrupt on their credit reports. While your credit score may have taken a few hits, you are probably in a better financial position than before you went bankrupt.
Auto loans can be a great way to heal your credit reports after bankruptcy. While bad credit lenders almost always require a down payment to qualify, if you have an equity swap it can help you meet this requirement.
If you are discussing refinancing or purchasing another vehicle, you have an outstanding car loan. Typically, dealers can accept an exchange if it works. The fitter he is, the higher the offer you are likely to get. Just be aware that you need to get an offer high enough to cover your loan balance to sell the car.
While most dealerships can take swaps, not all auto lenders can help bankrupt borrowers, but those who can are called subprime lenders. They are registered with special funding agents. These lenders look at more than your credit reports and credit scores to determine your creditworthiness – and part of that is having a down payment.
If you don’t qualify to refinance your current car loan, working with a subprime lender might be the solution. You can potentially use your current vehicle as a down payment to help meet requirements, and get back on the road to better credit after bankruptcy.
Auto loan requirements in bankruptcy
While all auto lenders vary in their specific requirements, subprime lenders tend to have similar guidelines and standards that borrowers must adhere to.
Subprime lenders typically require a down payment of at least $ 1,000 or 10% of the vehicle’s selling price (sometimes the lesser of the two). If your trade can cover this requirement, then any other money you have on hand is just gravy.
Other common requirements of subprime lenders include:
- Minimum gross monthly income of around $ 1,500 to $ 2,500
- A valid and up-to-date driver’s license
- A recent utility bill or bank statement proving your residence
- A working landline or cell phone
- A list of five to eight personal references
If you’ve just completed bankruptcy and the discharge has not yet appeared on your credit reports, expect to need your discharge document to prove that you are ready for a car loan.
Ready to move?
Whether you’re ready for a refinance or auto financing, we want to help. To begin the process of finding a refinance lender, start here.
If you’ve decided to get a car loan, we can help you too. Here has Auto Express Credit, we have created an extensive network of dealers who are registered with subprime lenders. To be matched with a dealer in your area who can help bankrupt borrowers, complete our free form auto loan application form.