Step four — Get a car loan.
Very quickly, a recap of what you’ve done since your bankruptcy
discharged:
- You’ve been saving cash and all of
your important financial records like paystubs, bank
statements, etc.
- You have a secured credit card (or
two) that you’ve used only once and that has no balance.
- You have saved enough money to have
an emergency fund AND a down payment for a car.
Usually, this process takes a few months
(3 to 6). As long as all three of the above statements are true,
you’re ready to
buy a car after your
bankruptcy.
Remember that the car you buy after
bankruptcy is going to have a high interest rate (at least at
first). There’s no way around it. It’s a fact of the
re-establishment process. But if you follow this advice, in a
year or two you’ll be getting the same rates advertised on TV
and driving the car you want.
OK - time for a reality check. You filed
bankruptcy less than two years ago and you still haven’t fully
re-established. At this point in time, banks are only going to
give you a car loan big enough for basic transportation. That’s
about $10-$15k. Depending upon the age of the vehicle you want
to buy, you’re going to get a loan that’s only 3 to 5 years in
length (anything longer is considered too risky). Finally, it’s
going to be hard to buy a vehicle that’s more than 4 model years
old or that has more than 60k miles. While there are exceptions
to all of this, these are the basic facts.
When a lot of people find these things out
they become discouraged. Many trucks and SUV’s are too expensive
for someone who is still trying to re-establish (at least
according to most banks). Sometimes, people decide to wait to
buy until something changes.
But buying a car makes sense because
you’ll re-establish faster if you do so. By combining your good
payment history from step 3 with 6 to 12 months of car payments
made on time, your credit score is going to climb into the mid
to high 600’s and you’ll have credit history to back it up. In
other words, you can be re-established 6 to 12 months after
buying a car.
But if you choose not to buy a car, it
could take two or three years to re-establish. While
there’s nothing wrong with waiting, a lot of people can’t afford
to do so. If that’s the case, then the best thing to do is to
remember your next car purchase isn’t going to last forever.
Like I said, if you make 6 to 12 car
payments on time your credit score should climb considerably and
your credit will be re-established. That means you only need to
keep the car you buy for a year or less. Here’s how to buy that
car and re-establish as inexpensively as possible.
First of all, buy a car that’s 2 or 3
years old. If you buy a new car, you’ll lose thousands of
dollars in depreciation when you go to trade it in next year. If
you buy something 5 or 6 years old, you’re going to have to deal
with repairs. Second, get something that has high resale value —
small cars and small SUVs are best. Third, try not to spend more
than $10,000. The less you spend on the car the more you’ll save
in taxes, finance charges, and depreciation over the next year.
Think of this car as a very short term investment and treat it
like gold. Your goal here is to lose as little as possible when
it’s time to trade. Finally, put at least 10% down (preferably
20%), and only finance with a nationally known bank (examples
include Ford Credit, Toyota Credit, GMAC, BankOne, Wells Fargo,
Chase, etc.). Local regional banks or credit unions won’t help
your credit build as much as a national lender.
If the prospect of driving a cheap used
car doesn’t get your motor running, I understand. But it is the
smartest way to re-establish. If you do find a way to buy a more
expensive car, make sure that you make every attempt to
refinance the loan starting six months after you buy it.
Refinancing a car is harder than buying a new one and you may
have to wait as much as two years before you can drop the
interest rate on your loan.
In steps one through four you’ve put
yourself on pace to be re-established within 12-18 months of
your bankruptcy discharge. Re-establishment is nearly complete.
Next Step: Step Five