auto loan financing 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.

Used vs. New Car: Which One Is Right for You?

Posted on November 2, 2022November 10, 2022 by Autopay

Purchasing a car is a big decision. It’s not only a major purchase but also a long-term commitment. Whether shopping for a new or used car, both options have pros and cons.

So, which one is right for you? From considerations like auto financing to vehicle history reports, we’ll help you make the best decision for your needs. Here’s a look at the pros and cons of buying used versus new cars and what you need to consider before deciding.

Pros of Buying a Used Car

There are many reasons why buying a used car can be a good idea.

Upfront savings – You can often get a used car for significantly less money than a new one. This is especially true if you buy from a private seller or an auction. Dealerships typically charge more for used cars. That’s because you might have more negotiating power when purchasing a used car than a new one. This varies depending on the dealership or seller, but it’s generally easier to haggle over price on a used car.
Less depreciation – A used car will usually have already taken its biggest depreciation hit. New cars lose significant value as soon as they’re driven off the lot. This better insulates you from negative equity situations if you need to sell the car.
Monthly savings – You can expect lower monthly car payments and insurance rates with a used car. And often, you can save even more down the line with auto refinancing if interest rates drop.
More personality – Some people prefer driving a used car. There’s something about knowing that your car has lived a little that can make it feel like more of a companion than a brand-new machine.

Now let’s take a look at the cons of buying a used car.

Cons of Buying a Used Car

There are a few potential drawbacks to consider before buying a used car.

Maintenance history – It’s impossible to know the vehicle’s complete history. Even if you buy a used car from a reputable dealer, it’s difficult to know how the previous owner(s) treated it. If previous owners haven’t maintained it properly, unseen damage might lead to repairs in the future. To assist you in identifying any potential concerns, get a pre-purchase inspection from a professional mechanic.

Man pointing out a blemish on a used car

Potential problems – In addition to maintenance issues, there could be other car problems that you’re unaware of. For example, the car might have been in an accident that wasn’t reported, or there could be hidden damage from a previous owner. Again, a pre-purchase inspection can help you identify any potential problems.
No warranty – Used cars usually don’t come with a manufacturer’s warranty. If something goes wrong, you’ll be responsible for the repairs.
Less choice – When you buy a new car, you can choose the model, color and options you want. When you buy used, you’re limited to what’s available on the market. Also, used cars generally have fewer features than new cars and might not have the latest safety technology.

Now let’s examine the pros and cons of buying a new car.

Pros of Buying a New Car

There are some significant advantages to buying a new car.

Up-to-date features – New cars always have the latest technology, safety features and creature comforts. If you’re looking for the latest and greatest, a new car is the way to go.
Warranty and lower maintenance costs – New cars usually come with some type of warranty that covers maintenance and repairs for a certain period. This can help decrease costs if something goes wrong with the car.
Financing options – You might be able to get a better financing deal on a new car than a used one. This is often true if you’re buying from a dealership. It might offer promotional rates or other incentives that make financing a new car more attractive. In addition, you can increase these savings later if you refinance when rates drop. You can use a refinance car loan calculator to see how much you can save.
New car smell – There’s something about that new car smell that some people can’t resist. It signifies a fresh start and a clean slate. So if you’re looking for that new car experience, getting that new car smell might be essential.

Now that we’ve taken a look at the pros, let’s discuss the cons of buying a new car.

Smiling, happy couple accepting keys to their new car

Cons of Buying a New Car

There are also some potential drawbacks to consider before buying a new car.

Higher cost – The cost is the biggest downside to buying a new car. They’re simply more expensive than used cars. This can be due to supply chain issues, production costs and marketing expenses.
Higher insurance rates – New cars also tend to have higher insurance rates than used cars. This is because they’re more expensive to replace if stolen or totaled in an accident.
Availability – Thanks to supply chain issues and chip shortages, specific models might have limited availability. This makes it challenging to find the exact car you want, and you might find yourself waiting for up to a year until it’s available.
They don’t stay new – This might seem like an obvious point, but it’s worth mentioning. No matter how well you take care of your new car, it will never be brand new again. It will eventually show signs of wear and tear, and you’ll have to deal with the inevitable repairs and maintenance that come with owning a vehicle.

The list seems to be pretty evenly split.

Which Is Right for You?

Ultimately, the decision comes down to your needs and preferences. A new car is probably the way to go if you’re looking for the latest features and technology. However, if you’re on a budget or prefer a used car’s personality, you might want to consider going that route. Whatever you decide, be sure to do your research and shop around to get the best deal.

How Soon Can You Refinance a Car?

Posted on August 24, 2022September 13, 2022 by Autopay

If you’ve considered refinancing your car, know that it might be possible to refinance as soon as a few months after your original purchase, though your terms could be better if you wait six months to a year. Don’t wait too long, though. If you are too far into your repayment term, lenders might be unwilling to approve your application.

Refinancing a Car Loan

Refinancing a car loan involves getting approved for a new loan that will:

Pay off your current auto loan.
Allow you to pay off your vehicle under more favorable terms.

Refinancing will require you to apply for a refinance loan, a process similar to auto loan financing for a new car.

Refinancing in the First Months of Your Loan

If you recently purchased a car and aren’t happy with your current loan terms, refinancing might be a possibility. Still, there are several factors that could hamper your ability to win approval for a refinance or to get the terms you are looking for:

In cases where you have very recently purchased your car (such as in the past month), your car title or registration might not yet be processed. A lender will either need the title (if you are in one of the states that allows car owners to hold their titles before loan payoff) or registration to begin the refinancing process. Because of this, there might be a delay in being able to refinance.
Taking out a car loan often lowers your credit score. This is due to two factors. First, the hard pull on your credit report results in a credit inquiry being reported to the credit bureaus. This can take a few points off your score. Your loan also contributes to your debt load, which, depending on how much debt you have, can also lower your score.
Some lenders have a policy against refinancing a new loan. They’ll want to see at least six months of payments before considering your refi application.

Still, everyone’s situation is unique and you could be able to get approved for refinancing in the earliest months of your loan.

When Is the Right Time to Refinance a Car Loan?

Loans that are six to 18 months old are often in the “sweet spot” for refinancing. There are two primary reasons for this:

No administrative or credit issues: By this time, your paperwork has been sorted out and your credit score has likely rebounded.
Loan balance is still high: A higher loan balance makes the refinance profitable for the lender.
It’s less likely that you are upside down on your car loan at this point. Being upside down on your car loan means that you owe more to your lender than your car is worth. Many lenders won’t consider refinancing in this situation.

There are other factors to consider, however. If interest rates are currently high, refinancing is likely not a good idea. Pay attention to economic indicators before seeking a refi loan.

Another thing to consider is your use of credit and financial situation. If you have recently financed a large purchase, you might find it hard to get attractive terms on a refinance. Use our refinance car loan calculator to determine how much you’ll pay each month and over time.

Don’t Wait Too Long to Refinance Your Car Loan

Unfortunately, it’s also possible to wait too long to refinance your auto loan. Here are some scenarios in which this could be the case:

Your car has a lot of miles on it: Cars with a lot of mileage are worth less, which can make refinancing more of a challenge.
You are close to paying off your loan: Lenders want there to be at least a few thousand dollars left on your loan balance before agreeing to issue a refinance loan.
You are already in financial trouble: Refinancing a car loan can be a decent strategy if you need to lower your monthly payments, you still have good credit and a verifiable income. If your credit has already been damaged or you’ve lost your job, you might still qualify for refinancing, but the process might take a bit longer.

It pays to be a savvy consumer, particularly when it comes to large purchases. If you believe that you might be able to get a better deal on your auto loan through refinancing, take the time to do some research and then make sure to shop around to find the best loan for you.

Tag: auto loan financing