Data from the American Bankruptcy Institute for 2017 shows there were 44,407 bankruptcies in Georgia. After having your debts discharged in a bankruptcy you may begin to turn your focus to rebuilding your financial wellness. Rebuilding your credit is a process that will take time. Financing an automobile is one of the more likely ways of reestablishing your credit. The overall goal should be to obtain a dependable vehicle that is well within your budget. Phil Reed, a senior consumer editor with Edmunds.com, explained it is important to remember “you do have options”. He says that some lenders are ready to work with consumers with poor credit.
Post-Bankruptcy Credit Standing
A Chapter 7 will remain on your credit history for 10 years and a Chapter 13 for a period of 7 years. The challenge will be to improve your credit standing. Following a bankruptcy your credit score will likely be an abysmal 500 to 550. It is unlikely that you will qualify for a mortgage loan for a while; however, a car loan should be a possibility, although you will face a high interest rate. When seeking an auto loan it is important to look at several options and try to find the most reasonable rate you can.
Review Credit Report
Several months after the finalization of the bankruptcy it is a good idea to review your credit report. You are entitled to a free report annually, which can be accessed from sites such as AnnualCreditReport.com or Credit.com. This serves two primary purposes. First, it is important to be sure that there are not any errors in discharging your debts. In addition, this provides you will a starting point from which to improve. At this time you also need to realistically consider you current income and expenses to determine what you can truly afford to spend on a vehicle.
Subprime Lending
The segment of the automobile lending market that specifically offers loans to those with poor credit is known as “subprime”. Some larger auto dealers have departments dedicated to providing these loans that use terms such “special financing”. There is not a clearly defined credit score that is considered to be subprime, but generally it is those with a score below 640. States have their own limits on the maximum allowable interest rate that subprime lenders may charge. Research shows that subprime borrowers who obtain an auto loan have a four times greater likelihood of improving their credit score to 640 or higher compared to those who do not.
High Interest Rates
You will want to calculate what your monthly payment will be based on the term of the loan and the interest rate so that you do not waste time considering vehicles that are beyond your price range. Here are some general ranges[1]:
| Score Range | New Car Rate | Used Car Rate | |
| High-prime | 781-850 | N/A | N/A |
| Prime | 681-780 | N/A | N/A |
| Nonprime | 601-680 | 6.75 % | 10 % |
| Subprime | 501-600 | 11.0 % | 16.25 % |
| Low Subprime | < 500 | 13.75 % | 19.25 % |
Obtaining Pre-Approval
Based on your poor credit it may be best to secure your financing prior to shopping for a car so that you know what your interest rate will specifically be by obtaining a pre-approval. You may consider local banks, credit unions, dealer finance departments and others. You should gather your financial information such as current pay stubs, W-2 or 1099 tax documents, and/or bank statements as needed to prove income. You should strive to save for a down payment. Lenders generally perceive loans to those with reasonable down payments as being less risky and a down payment reduces the amount you need to borrow.
Avoiding Predatory Lenders
It is important that you avoid the worst of the loans available, which may approach the level of being deemed as “predatory”. It is generally best to avoid “buy here, pay here” (BHPH) auto dealership financing. These are used auto dealers who often market specifically to those with poor credit that essentially also function as a lender direct to you. They generally have a smaller selection of vehicles, mostly higher mileage vehicles, longer loan terms, and extremely high interest rates. You are more likely to end up with costly auto repair bills while trying to repay the loan. It is also critical to know that many BHPH dealers do not report to the credit bureaus, meaning that your history of making payments on time will not benefit your credit.
Rebuilding Your Credit
Always make your auto loan payments on time so that your credit history will begin to improve. If you suffer a temporary financial setback that will cause you to miss a payment date, be sure to contact the lender. Many auto lenders will be willing to work out arrangements to deal with a temporary financial situation and you may avoid repossession. You may want to also consider other ways of improving your credit during this time such as by obtaining a credit card. Initially you may only qualify for a secured credit card that requires you to make a deposit and has a low spending limit, but when used properly it will help boost your credit standing as well.
Refinancing
As you consistently repay your auto loan for a year or more and take other steps to obtain and demonstrate the responsible use of credit, you may consider refinancing the car loan. Your existing lender is unlikely to refinance your loan, but doing some research should help you find a lender. To be worthwhile you should obtain a loan that has a lower interest rate that will allow you to either lower your monthly payment or pay off the loan sooner—or ideally both!
Georgia Bankruptcy Lawyer
Have your debts reached a level where they are no longer manageable? It may be time to consider the possibility of bankruptcy. Federal laws allow for those with unsustainable debt levels to pursue a fresh start. Contact the Law Office of Jeffrey B. Kelly today for a consultation.