How to get an auto loan after bankruptcy
Getting an auto loan after bankruptcy can be scary. Some even assume that they won't be able to find an auto financing lender until the bankruptcy is no longer on their credit report, which isn't true. Although the interest rate might be higher or a down payment might be required, the truth is that even after bankruptcy, you can still get an auto loan.
- Check your credit score. Verifying that your credit report is free of errors before sending to lenders is important, especially sections pertaining to past auto loans. Timely auto loan payments before or after bankruptcy can count positively.
- Prepare a down payment amount for the auto loan. The larger the down payment, the less risk the auto loan lender is taking. A trade-in can also count towards with a down payment.
- After checking your credit score and setting aside an auto loan down payment, try to get pre-approved for an auto loan. This gives you leverage when you approach dealerships. To get pre-approved, collect all of your relevant financial documentation and spend one day shopping for loans. It's ideal to limit shopping to one day to avoid multiple inquiries on your credit score, which could lower it.
If you consider taking an auto loan from the dealership you buy your car from (also known as "buy here, pay here"), be cautious. Because the loans they offer are convenient, the interest rates may be higher and contract terms may be more obscure. Defaulting on an auto loan may not be possible due to your previous bankruptcy, so it's a good idea to double check.
Finally, after getting your auto loan, make sure to make your payments on time. This can aid in improving your credit after bankruptcy, after which you may be able to refinance your auto loan at a lower interest rate.
Variable vs. fixed rate auto loans
When shopping for auto loans, you will run into two different types of car financing: variable rate and fixed rate. Although it's clear that the lower the interest rate the better, the difference between variable and fixed rate auto loans is sometimes not as clear.
Variable rate auto loans
With variable rate auto loans, your rate will change according to the U.S. prime interest rate, a guideline used by banks and other lenders. Interest rates with this type of auto loan will fluctuate depending on current market rates, so when interest rates are consistently low, it may be a good choice to opt for a variable rate auto loan. However, a variable rate loan can be riskier if it is longer term, as there is more time for the interest rate to increase. It is also difficult to calculate what you will pay over the life of the auto loan since interest rates are difficult to predict.
Fixed rate auto loans
Fixed rate auto loans do not have a varying interest rate and are constant throughout the duration of the loan. By accepting a fixed rate auto loan, you are guaranteed that interest rate, whether market interest rates rise or fall, and the amount you are paying in interest is easy to calculate. If you are most comfortable with a specific monthly payment on your auto loan, a fixed rate loan is the right choice.
The best option for a majority of car owners is a fixed-rate, short-term auto loan with affordable payments.
Breaking down annual percentage rate (APR)
Understanding what annual percentage rate (APR) means is an important part of the car buying process. In the simplest terms, your auto loan APR is the total amount of interest you'll pay over one year on the money you've borrowed for your car.
When you borrow money for an auto loan, you have to pay back the principal (the actual amount you borrowed). Along with the principal, you also have to pay interest, which is the cost for borrowing the money from the auto loan company. The APR is the number that’s used to calculate how much interest is paid over a year depending on the amount of the principal.
APR is different than your interest rate, but it's easy to calculate one from the other.
APR = (interest rate per term) * (number of terms in a year)
For example, if your interest rate on an auto loan is 2% for each term and you pay once a month, your APR is 24%, since 2% multiplied by 12 (the number of months in a year) is 24%. In this case, 2% is your auto loan monthly periodic rate, or the interest you pay every month on what's left of the principal.
The APR an auto loan company offers you is generally based on your financial history, especially your credit score, as well as the amount financed and amount of the auto loan. When you start shopping for auto loan rates, you can use the APR to compare two loans at a glance.
Auto loan rates over the years
Auto loan rates have changed significantly over the years, and they're lower now than ever before. These rock-bottom auto loan rates come from competition among auto loan lenders such as big banks and fluctuation of the Federal Funds Rate.
In November of 1990, the average auto loan APR was over 11.6%. In 2008, the Federal Reserve finished lowering the short-term cost of money to present levels, and auto loan rates decreased slowly over the next year to around 7%, decreasing more steadily in 2010. During the worst of the recession when loan requirements became stricter, the average credit score of car buyers was 776. However, as the auto loan rate continued falling in 2011 and 2012 and banks became stronger, auto sales revived and lenders began offering subprime loans again. In the first quarter of 2012, the average credit score for new car loans dropped to 760. Since then, the downward trend has continued, although a little slower. As of December 2015, auto loan rates were on average 4.6%.
In a 2014 study of auto loan rates, major car brands have also followed this trend in financing. Many, including Honda, Acura, Kia, and Mazda, have average APRs below 1%. Under 2% are Buick and Audi, while Chevy, BMW and Lexus are all under 3%. Even Ford and Fiat, who offer the most expensive auto loan rates, don't pass 5%.
Both now and historically, auto loan rates for new cars are cheaper than rates for used cars, but the gap is wider than ever right now. For consumers in the subprime credit range, auto loans approvals are more plentiful now and interest rates are lower than they have been in the past.
Online auto approvals: Are they real?
Online auto loan approvals make shopping for auto financing easier. They do exist, are reliable, and can be the fastest and easiest way to get approved for an auto loan. With the dozens of sites that offer pre-approval lending online, you can land an auto loan without ever having to talk to a bank or credit union.
The benefit of shopping online for auto loan approval is the convenience and the wide variety of options. There's no need to search through a phone book, fill out numerous auto loan applications by hand, or wait by the phone for an answer. With most online auto loan sites, you know within minutes whether or not you've been approved.
Interest rates may be a little higher for people with subprime credit scores, but there are many auto loans available online from subprime lenders. It's important to be careful throughout the pre-approval process and remember that unless a lender pulls your credit report, the approval may not be legitimate.
After being approved by an online auto loan lender, you can take your paperwork to a dealer immediately and purchase a car. This way, you will already have an idea of what your budget for a car is and what your monthly payment will be.
Auto loan offerings online differ in a number of ways--namely, by their application process, their rates, and their customer service. Most lenders offer auto loans for new cars and used cars, and many offer refinancing as well. Doing your research online and reading reviews for different sites will help you make a good decision and avoid lenders that may have hidden fees.