January 29, 2018

Purchasing a car after a bankruptcy or proposal

You may be faced with having to replace your vehicle after filing for bankruptcy or a proposal. If you have looked at other options and believe that you need to purchase a vehicle, the following tips may assist you with making your decision to obtaining a vehicle within your budget.

  1. It is easier to purchase a vehicle after you have completed the bankruptcy or proposal and your debts are discharged. If your debts have not been discharged, you may wish to consider other alternatives such as transit, borrowing a vehicle from a friend or relative, or carpooling until you obtain your discharge. However, if you do need to replace your vehicle during the bankruptcy or proposal process, it may still be possible to obtain financing. 
  2. Interest rate. It is unlikely that you will be eligible for the zero rate loans that are advertised and should expect to pay higher rates based on your risk, determined from your credit rating. Lenders perceive individuals that have filed a bankruptcy or proposal as a higher risk. Interest rates may be in the range of 15 to 20% which will increase your monthly payment. For example, for a $10,000 loan, your monthly payment at 15% is estimated at $238 while at 18% is $254 for a five year loan. Some factors that can reduce your interest rate are listed below.
    1. Down payment. Putting a minimum of 10 to 20% towards the car at the purchase will reduce the overall loan and risk to the lender.
    2. Co-signer. Having someone co-sign your loan will reduce the risk to the bank. However, you should consider that if you default on your loan, the co-signer can be held responsible for the remaining balance of your loan.
    3. Frequency of payments and payment term. The more frequent your payment, or the shorter the loan period, the lower the total interest that you pay.
    4. Loyalty program with dealer. If you are replacing your car with the same dealer and have maintained your payments with no default, the lender may consider your loan history in their decision.
    5. Steady employment.
    6. Cause of bankruptcy or proposal.
  3. Budget to manage your expectations. It is critical that you review your budget to determine what monthly payments you can afford for the entire loan period. You must remember to include the costs of owning the vehicle in your budget as these may vary from your prior vehicle. Generally, if your loan period exceeds 5 years, the vehicle may be beyond your budget. Your vehicle may not survive the repayment period or will incur significant maintenance costs that may result in your having to purchase a replacement before the existing loan is repaid.
  4. Advise your trustee if you are currently in a bankruptcy or proposal. It is important that you let your trustee know that you are applying to purchase a vehicle if you are still in your bankruptcy or proposal. In most cases, the lenders will want to contact the trustee regarding the status of your file and payment history. You may also find that your trustee may be familiar with the lender you are using and other factors due to experiences from other debtors. 
  5. Research lenders. There are generally 3 sources you can approach to apply for a vehicle loan. It is important that you consider more than one lender for comparison of interest rates and other possible hidden costs. For example, is there a warranty offered to reduce the risk of unexpected maintenance costs on your vehicle.
    1. Auto dealerships. Most auto dealers will offer financing of used vehicles to persons with poor credit but at a much higher interest rate.   The loans can be through the dealer themselves or bank auto loans such as those offered by TD Auto Finance or Scotiabank. You should consider advising the dealer at the onset that you have filed a bankruptcy or proposal to ensure that they are receptive to lending to you. They will perform a credit search and discover this before they approve the loan anyways.
    2. Auto brokers. You can search auto brokers on line. Their role is to find a vehicle that is within your financial budget. They will find a lender and vehicle to match your budget.
    3. 3rd party lenders. You can search auto loans on line to obtain a list of 3rd party lenders that will lend with a low credit score. It is important that you do your research to ensure that the company is reputable.
  6. Other considerations. One positive factor to obtaining a car loan is that it will assist in improving your credit rating if it is within your budget and you are able to maintain your payments on time.

WHERE CAN I FIND MORE INFORMATION?

Kwasnicky & Associates Inc. is a licensed insolvency trustee. If you are struggling with debt repayment or concerned about your credit score, take the first step and contact us for a free, confidential assessment of your financial options.

Debora Kwasnicky