Personal finance Archives

Is Refinancing a Car Loan After Bankruptcy Possible? Everything You Need to Know

Posted on December 14, 2022December 14, 2022 by Autopay

Bankruptcy.

It’s a scary word describing someone in an unenviable financial position. But it’s not exactly a rarity. In 2021, there were 413,616 bankruptcy claims.

The word “bankrupt” stems from the Italian term “banca rotta,” which translates to “broken bench.” In 16th century Italy, money dealers worked from benches and tables. If funds ran dry and they went out of business, their benches would be broken in half. Fortunately, if you file for bankruptcy, no one’s going to come smash your furniture. But there could be some repercussions.

One immediate drawback is the extensive damage bankruptcy can do to your credit. For auto loan borrowers, that means you could have a hard time qualifying if you want to refinance your car loan— but it’s not impossible.

Whether you’re on the fence about filing or you’re in the middle of court proceedings, let’s explore bankruptcy and how to approach refinancing afterward.

What Is Bankruptcy?

Whether you’re on the fence about filing or you’re in the middle of court proceedings, let’s explore bankruptcy and how to approach refinancing afterward.

Bankruptcy can help individuals or businesses climb out of major financial holes. When borrowers can’t repay their lenders, they have the option of filing for bankruptcy in a federal court. This legal process could result in the discharge of all or a portion of your debts, essentially setting you up for a fresh start.

There are six types or “chapters” of bankruptcy:

Chapter 7, also known as “liquidation,” results in the sale of nonexempt property in order to repay creditors.
Chapter 9 is for the reorganization of municipalities, which is very rarely used (fewer than 500 times since the 1930s) and irrelevant to drivers.
Chapter 11 is often referred to as “reorganization” bankruptcy. Although individuals can file for chapter 11, this is the most complex and expensive form of bankruptcy, so it’s more commonly used by businesses.
Chapter 12 is reserved for family farmers and fishermen with regular income.
Chapter 13, which is also called “a wage earner’s plan,” allows for individuals with regular incomes to set up debt repayment plans.
Chapter 15 is the most recent addition to the U.S. bankruptcy code. This chapter was designed for cross-border insolvency cases, so it’s rare and likely irrelevant for the typical driver.

We’ll focus on the two most applicable bankruptcy chapters for auto loan borrowers: chapter 7 and chapter 13.

An Overview of Chapter 7 Bankruptcy

Chapter 7 bankruptcy is also known as “liquidation.” Despite the ominous title, the goal of bankruptcy law is to protect borrowers from crippling debt and help them get back on their feet.

Once you file for chapter 7, the government will assign a trustee to your case. They’re responsible for liquidating your nonexempt assets — such as second vehicles, vacation homes, and collectibles — and repaying your creditors with the proceeds.

On the other hand, some of your property is considered exempt under federal and state laws. These definitions vary, and borrowers may have the right to leverage their state’s definition of exempt property instead of the federal definition. For instance, the U.S. Bankruptcy Code allows a filer to exempt up to $2,400 of equity interest in one vehicle, while the state of Idaho bumps that limit up to $10,000.

However, bankruptcy does not remove liens on property. So, if you have a secured loan (like a car loan), the lender will still have a security interest in the underlying asset after bankruptcy, meaning they can repossess the car if you stop making payments.

Note that chapter 7 eligibility isn’t guaranteed — you have to qualify.

Can you refinance a car during chapter 7 bankruptcy?

Generally speaking, you’ll need the court’s approval to enter a new loan agreement during bankruptcy. It’s probably not worth applying for a refinance loan during legal proceedings though.

For starters, chapter 7 bankruptcy typically lasts between three and six months. Waiting could help you avoid going through the court system. Moreover, once you file for bankruptcy, it’s public record and accessible by the major credit bureaus (e.g., Experian, TransUnion, Equifax). In all likelihood, making it difficult to find a lender.

An Overview of Chapter 13 Bankruptcy?

Chapter 13 can be a less drastic option compared to chapter 7, especially if you want to avoid liquidation.

This type of bankruptcy enables you to set up a repayment plan for your debts, potentially at a discount. Plans are typically three to five years and effectively consolidate your payments — everything flows to the trustee, who then distributes the remitted funds to your creditors.

You may even be able to reduce your secured debts to the values of the underlying assets, a process known as a cramdown.

For instance, if your car is worth $10,000 but your loan amount is $15,000, you could cram down your obligation to $10,000 through your repayment plan. The remaining $5,000 would be lumped into the rest of your unsecured debt (like credit cards), of which the court may only mandate you to repay a portion back.

In either case, before you decide to pursue bankruptcy, it’s worth seeking legal counsel as bankruptcy cases are quite complex.

Can you refinance a car during chapter 13 bankruptcy?

Considering chapter 13 proceedings take longer, you might be wondering if you can refinance during bankruptcy.

The short answer is yes. But you face the same hurdles as before — the court has to approve your refinance loan. Your initial payment plan was approved according to your income and expenses when you filed. By refinancing, the court would likely reassess your financial situation, which could influence your monthly payments.

And, again, you still have to qualify, which is challenging with low credit.

Building blocks that spell out bankruptcy

How Bankruptcy Affects Your Ability to Refinance Your Car Loan

Contrary to what you might think, it’s possible to refinance your car loan after bankruptcy. That said, it’s an uphill climb and don’t be surprised if it takes months (or even years) to repair your creditworthiness.

Let’s explore the various ways a bankruptcy could affect your ability to refinance.

Credit score

Once debts are discharged through bankruptcy, they don’t just vanish. Chapter 7 bankruptcies stay on credit reports for ten years, while chapter 13 bankruptcies stay on credit reports for seven years. As you can imagine, bankruptcies tend to have a negative impact on a credit score.

The severity of the point drop depends on what your score was before you filed. If you have an above average score, expect your scores to plunge 200 to 240 points. If you have an average score like 680, your score could slip between 130 and 150 points. Regardless, loan underwriting programs will likely flag you as a risky borrower.

Qualifying

The very nature of lending money is risky — there’s always a chance that the borrower doesn’t repay. When a borrower has filed for bankruptcy, it demonstrates an inability to manage debt. That’s not very enticing to the typical lender.

When you have a lower credit score or a negative credit history, you may not qualify for refinancing, at least through traditional financial institutions like banks or credit unions.

After filing for bankruptcy, it can be difficult to get the best auto loan rates. Lenders typically reserve their best rates for borrowers with excellent credit. However, you may qualify for a subprime loan with higher interest rates and a steeper monthly car payment. Granted that’s far from ideal, a refinance could still help you secure a better loan rate.

According to data from our sister company, RateGenius, 30% of borrowers with a bankruptcy on their record managed to successfully refinance — and they reduced their rate by 5% on average.

Regardless, it’s prudent to shop around and compare loan offers to potentially get a lower interest rate. You can use a marketplace like AUTOPAY to streamline this process.

Loan Fees

Subprime loans not only have high interest rates but also worse loan terms, such as documentation fees, prepayment penalties, and higher late fees. Keep an eye out for these terms when comparing loans, and tinker with a refinance calculator to ensure a new loan is worth it.

How To Improve Your Chances of Refinancing a Car After Bankruptcy

We’ll give it to you straight — you’ll have a hard time refinancing a car after bankruptcy. And considering it’ll remain on your credit report for 7 to 10 years, you might have trouble getting approved for any sort of loan for quite a while.

But there are steps you can take to improve your credit and chances of qualifying in the meantime.

Bolster your debt-to-income ratio

Your credit scores are an important factor, but they aren’t the only aspect of your financial profile. While your credit quantifies your reliability as a borrower, it doesn’t include your income.

So, in addition to your scores, lenders also evaluate your debt-to-income ratio (DTI). This metric compares your monthly obligations to your gross monthly earnings — essentially measuring the percentage of your income that’s already tied up in other financial commitments.

Generally speaking, it’s recommended to maintain a DTI below 50%. But the lower, the better.

According to data from our sister company, RateGenius, 90% of borrowers who were approved for refinancing had a DTI below 48% from 2015 to 2019. While it’s easier said than done, if you can swing a higher paying job or work part-time for a while, you can improve your DTI and potentially convince a lender to overlook the bankruptcy.

Pay off a chunk of your existing car loan

Auto loans are considered secured loans. In other words, the vehicle serves as collateral, which means the lender could repossess it in the event the borrower stops making payments. The lender would then try to recover its investment by selling the vehicle.

Why is this important? Well, the lower your loan balance relative to your car’s value (known as your loan-to-value ratio), the easier it is for a lender to make itself whole if they ever have to sell your car. This could help mitigate a lender’s concerns about your bankruptcy history and potential risk of missing payments.

Rebuild your credit

Although bankruptcy helps prevent you from suffocating under a pile of debt, it could put a stain on your credit, making it harder to take out loans and lines of credit in the future. That said, your scores aren’t locked in forever.

To rebuild credit, you need access to credit. Credit-builder loans and secured lines of credit can help. These products are easier to qualify for and help borrowers make on-time payments and establish accounts in good standing.

With good credit repair habits, your credit scores can gradually recover over time.

Consider a cosigner

Applying for a refinance loan with a cosigner can help you qualify. A cosigner promises to take responsibility for the loan if the primary borrower ever stops making payments. Ideally, this is a person who is not only trustworthy (like a parent or spouse) but also has a strong financial profile.

Don’t Rush, Understand Your Options

Bankruptcy is a viable solution for many financially distressed borrowers, but it isn’t the only option. It would be wise to explore alternative approaches to ensure you make the best decision. That may include speaking directly with loan providers to see if they’re willing to work with you, selling unnecessary assets, and asking friends or family for assistance.

You may even realize that you don’t need to go to court to rectify your situation, which can help preserve your credit and increase your chances of taking out new loans — including an auto refinance loan.

4 Tips to Save Money During Inflation

Posted on November 9, 2022November 16, 2022 by Autopay

As prices continue to rise, saving money is more important than ever. This article will help you understand how inflation affects your finances and offer tips on saving money during this time of economic uncertainty. Everything from car loan refinancing to budgeting habits can help you keep more of your hard-earned cash.

What Is Inflation and How Is It Measured?

Inflation is the rate at which prices for goods and services increase over time and a fall in the purchasing power of money. In other words, inflation eats away at your income and savings, making it harder to afford the things you need and want.

The Consumer Price Index (CPI) is a standard measure or barometer of inflation in the United States. It is a metric that tracks the change in prices over time for select goods and services that represent what urban consumers purchase. That means the CPI can measure how inflation affects the cost of living. Though it isn’t perfect, it remains a popular tool because it is relatively easy to understand and follow.

The Importance of Saving During Periods of Inflation

Saving money is always important, but it becomes even more critical during periods of inflation. That’s because your money doesn’t go as far when prices go up. So, if you’re not careful, you could struggle to make ends meet.

Saving during periods of inflation is also important because it can help insulate you from economic shocks. For example, if there is a sudden spike in inflation or prices start to rise faster than expected, having some extra savings can help weather the storm.

Best Money-Saving Tips for Periods of Inflation

You can do several things to save money during periods of inflation. Here are a few tips:

1. Become budget conscious

A budget is an estimation of income and expenses over a specified period. It’s important because it can help you keep track of your spending, save money and make informed financial decisions. When inflation is high, budgeting can be beneficial.

Budgeting can help you save money during inflation by tracking your spending and adjusting to ensure you are not overspending. Additionally, budgeting can help you to make informed decisions about where to spend your money.

When inflation is high, it is vital to be mindful of where you spend your money to get the most bang for your buck. By budgeting, you can ensure that your money is working hard for you even when times are tough.

a couple smiling while using a calculator and laptop

If you’re new to budgeting, the money experts at Forbes have put together a list of time-tested approaches to making a budget, including some of our favorites:

50-20-30 Budget – A budget that separates your spending into three categories: 50% for essential expenses, 20% for savings and debt and 30% for flexible spending. To make it more savings-friendly, consider upping the percentage that goes toward savings and debt.
Zero-Based Budget – A budget in which you give every dollar a job. This approach can be helpful if you are struggling to make ends meet or get out of debt. Just be sure to prioritize your essential expenses first and pay down debt.
Envelope Budgeting – A budget in which you use physical envelopes to store cash for specific expenses. This system can be helpful if you struggle with sticking to a budget.

It could be a good idea to try out each approach to see which one works best for you.

2. Reduce your expenses

Periods of soaring inflation are a perfect time to re-evaluate your needs and wants and a good time to search out areas where you’re needlessly spending money. It could be time to shop around and reduce some ordinary monthly household expenses, such as:

Cell phone and internet services – Look into bundling these services with the same provider or enrolling in a family plan to save money. You can negotiate your current rates or shop for a new provider.
Television and streaming services – Take a close look at your viewing habits and consider eliminating channels or services you don’t watch. In addition, if you have multiple streaming services, see if there are any that you can live without.
Insurance premiums – Compare rates from different providers to ensure you get the best deal on your car, home, health and life insurance. You might be able to save money by increasing your deductible or switching to a less expensive plan.
Gym membership – If you’re not using your gym membership regularly, consider canceling it. Instead, take advantage of free or low-cost activities like walking, running or working out at home.

There might be other bills you have that you can lower, as well. Make a list of all your monthly expenses, and then you’ll see which ones you might be able to cut out completely or at least try to lower.

3. Pay down interest-heavy debt

If you’re carrying high-interest debt, paying it down should be a priority – even during periods of inflation. The faster you can pay off your debt, the less money you’ll ultimately have to pay in interest. To save money on interest payments:

Refinance your debt – If you have good credit, you might be able to qualify for a lower interest rate by refinancing your debt. This could help you save money on interest payments and become debt-free more quickly.

For example, look at your auto loan financing and compare rates to see if you could get a lower monthly payment by refinancing. Then, use a refinance car loan calculator to estimate your new monthly payment.

Consolidate your debt – If you have debt with different interest rates, you might be able to save money by consolidating them into one loan with a lower interest rate. This could help you become debt-free more quickly and save money on interest payments.

Make extra payments – Whenever possible, make additional payments on your debt. Even an extra $50 or $100 per month can make a big difference over time.
Pay off high-interest debt first – If you have debt with different interest rates, focus on paying off the debt with the highest interest rate first. Once that debt is paid off, you can put more money toward paying off the remaining debt.

Taking these steps can help you pay off debt faster, which will save you money sooner.

4. Invest in inflation-protected investments

Inflation-protected investments, such as TIPS (Treasury Inflation-Protected Securities) and I Bonds (inflation-indexed savings bonds), are a good way to protect your money from inflation. With these types of investments, your principal investment is adjusted for inflation, so you don’t have to worry about losing purchasing power over time.

Planning, Discipline and Patience

Saving money during periods of inflation requires you to plan, be disciplined and have patience because it can take time for your efforts to pay off. But if you stick to a budget, reduce your expenses and pay down high-interest debt, you can make headway on your financial goals – even during economic uncertainty.

Also, don’t forget those inflation-protected investments. They can help you sleep soundly at night, knowing your money is safe from inflation. And you can always look into refinancing debt like your auto loan to help you save money, as well.

Buy a Car With Cash or Finance? Which Option Is Best for Your Personal Finances?

Posted on September 14, 2022October 11, 2022 by Autopay

When you’re in the market for a new car, you have two main options for paying for it: cash or financing. Both have pros and cons, so it’s important to weigh your options carefully before deciding. We’ll break down the key differences between paying cash for a car and financing one, so you can make the best decision for your personal finances.

Paying Cash for a Car

Buying a car outright with cash has some great benefits. Foremost, paying cash means you won’t have to worry about monthly car payments. In addition, this can free up some extra money each month to put toward other financial goals, like saving for retirement or building an emergency fund.

As well, if you pay cash for a car, you won’t have to worry about interest charges eating into your budget. So, in the long run, this method can save you money and, if you’re wise, even make you money by investing the extra cash you have each month.

However, there are also some downsides to paying cash for a car. To begin with, if you barely have enough to cover the total cost of the vehicle, you could end up overspending and putting yourself in a tight financial spot.

For example, if you pay cash for a car and something unexpected comes up (like an unexpected medical bill), you might not have the reserves on hand to cover it.

Not to mention, dealerships who are keen on selling financing packages might not be happy to hear you want to pay cash. To you, it sounds like a good deal for them and an easy sale, but they make a lot of money with those financing packages. So, don’t expect to use paying cash as a bargaining chip to get a lower price — it might not work.

Ultimately, you should only pay cash for a car if you have the full amount saved and you’re confident you won’t need to tap into those savings for other purposes. If this isn’t the case, auto loan financing might be a better option for you.

Financing a Car

When you finance a car, you’re taking out a loan to cover the cost of the vehicle. You’ll make monthly payments on this loan — a combination of the principal, interest, and any other fees charged by the lender — until it’s paid off.

For many people, financing is the best way to buy a car because it allows them to spread the cost of the vehicle over time. This can make it more affordable in the short-term and give you some flexibility if you need to tap into your savings for other purposes.

One of the most significant benefits of financing a car is that it allows you to purchase a more expensive vehicle than you could if you were paying cash. With average new car prices topping $45,000 in 2021, according to Forbes, financing is often the only way to afford a new vehicle.

Another benefit of financing a car is that it can be an excellent way to build your credit. As long as you make your monthly payments on time, you’ll be building a positive credit history that can help you down the road when you’re looking to take out a mortgage or another type of loan.

Of course, there are also some drawbacks to financing a car. To begin with, you’ll have to pay interest on your loan, which will increase the total cost of the car over time. If you get locked into a bad loan, this could cost you thousands of dollars in the long run and require you to refinance your car loan down the road.

Of course, this can be avoided by shopping around for the best interest rate and being mindful of the terms of your loan. Still, it’s something to be aware of nonetheless.

Additionally, suppose you have trouble making your monthly payments. In that case, you could risk damaging your credit score or even losing your car to repossession. This will make it difficult or costly to get another car loan in the future or secure other types of financing.

That’s why it’s vital to secure an interest rate and loan term that works for your budget and make sure you have a plan for making your payments on time each month.

Lastly, if you finance a car and later want to sell it before the loan is paid off, you might end up owing more money than the car is worth (this is known as being “upside down” on your loan). In these situations, you’ll have to cover the difference between what you owe and what the car is sold for to pay off your loan in full.

Make the Decision That’s Right for You

There’s no right or wrong answer when it comes to deciding whether to buy a car with cash or finance it. It all depends on your personal financial situation and what makes the most sense for your budget and comfort level with large financial expenditures.

woman sitting in the drivers seat of a car smiling while being given keys to her new car

If you have enough money to pay for a car outright, paying cash might be the best option for you as it can help free up extra money each month. However, if you don’t have enough saved up or want to purchase a more expensive vehicle than you could afford with cash, financing might be the better option.

Consider all your options and use an auto loan calculator to estimate your monthly payments before deciding. This will help ensure you choose the car-buying option that makes the most sense for your personal finances.

Should I Pay Off My Car Loan Early: Advantages and Disadvantages

Posted on August 3, 2022October 11, 2022 by Autopay

If you’re looking to improve your financial standing and lower your debt, you might want to consider paying off your car loan before the obligatory pay-off date. While doing so can certainly bring some benefits — more money in your pocket and the freedom of owning your car outright — there are a couple of important downsides to consider as well.

close-up of a pen on a desk with a calculator on top of a paper reading "Debts" with a pie chart near it

The Pros and Cons of Paying Off Your Car Loan Early

When you take out a car loan, you agree to pay for the cost of the vehicle (the principal) as well as interest. Your annual percentage rate (APR) is the percentage of interest you pay each month. When you pay more than the minimum, that extra money goes towards the principal, lowering how much you owe in interest. That’s just one of the pros of early pay-off, but there’s more to know.

Pro: Paying the loan off early could save you cash in the long run.

Making an extra payment here and there, rather than making a single lump-sum payment speeds up the repayment process without draining your savings. Just make sure your overage payments go toward the principal of your car loan rather than the interest. These are called “principal-only” payments.

Con: Some loans include precomputed interest, so early payoff may not save you money in the long-run.

It is important to note that some car loans include precomputed interest, or interest that is calculated upfront. In these cases, you may not be able to save money on interest if you pay off your loan early.

Make sure you determine the amount of interest pay-off will save you in the long run. To find out if your interest was calculated up-front, look at your statement. If your interest is precomputed, it will be lumped together with the principal rather than a separate fee. You should speak to your lender if you aren’t sure.

Pro: More money in your pocket each month.

Another advantage to paying off your car loan before the end of the term is that you will have less money tied up in bills each month. That means, in theory, you’ll have more money to spend in other areas of your life.

More money in your pocket each month may allow you to save up some extra cash faster for a new car, build an emergency fund, chip away at your student loans, or free up money for a down payment on a house. In many cases, it will help improve your financial situation. But remember that paying off your loan balance can be costly, so while it may lower your monthly budget, it may also put a significant dent in your savings account.

Pro: Improved debt-to-income ratio.

Simply put, your debt-to-income ratio, or DTI, is the percentage of credit you use each month divided by your gross monthly income. Your DTI is one of many factors lenders and other creditors use to determine whether you will be able to pay back a loan. If your debt-to-income ratio is too high, a lender might be hesitant to offer you credit since it could indicate that you’ve taken on more debt than you can pay back.

If you have a debt-to-income ratio above 50% and plan to apply for a new loan or line of credit soon, lowering your DTI can help improve your odds of getting approved.

So how do you lower it? By reducing your monthly debt obligations. Paying off a loan and eliminating a monthly payment, like a car loan, will improve your DTI. However, if paying off a loan in one lump sum is not possible, you can also try to refinance it to lower the monthly payment. In 2021, borrowers who refinanced their auto loans saved an average of $1,158 per year.

Con: You may have to pay a prepayment fee.

It’s critical you understand the terms of your loan since, although it’s rare, it may include a prepayment or pay-off penalty to your lender. Car loan companies impose these fees to make up for the potential interest lost over the life of your loan. These are more common if you have poor credit and a subprime auto loan (meaning you have a high interest rate on your loan due to bad credit).

Fees vary depending on the company and the terms of your loan, but you can expect to pay a maximum of 2 percent of your remaining balance in prepayment costs. Not all car loan terms include this penalty, so be sure to check yours before you decide what to do.

Con: less ‘positive’ activity on your credit score.

Man using his mobile phone to see his credit report and credit score

Consider All the Factors

Ultimately, deciding whether to pay off your car loan early is a big financial decision that comes down to a few key factors. The amount you owe, your interest rate, and the terms of your loan will have a major impact on whether or not prepayment is the best move for you.

Category: Personal finance