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Getting a Car Loan After Bankruptcy in Canada

Getting a Car Loan After Bankruptcy in Canada

Declaring bankruptcy can feel like the end of the road when it comes to your finances and credit. With a bankruptcy on your record, even simple things like getting approved for a credit card or car loan may seem impossible. However, rebuilding your credit after bankruptcy is very achievable with some patience and the right strategies. Access to reliable transportation is a necessity for most Canadians, even after bankruptcy. The good news is that getting approved for auto financing post-bankruptcy is possible sooner than you may think.


This guide will walk you through everything you need to know as a Canadian looking to get back on the road with a car loan after bankruptcy. With tips on how to re-establish your credit, find the best loan terms, and repay responsibly, you can get your keys and your financial life back on track. Though interest rates may be higher at first, a strong track record of on-time payments will put you in a good position to refinance at lower rates in the future. With some time and effort, your bankruptcy does not have to be a permanent roadblock to accessing the credit you need.

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Chapter 1 – Credit Score After Bankruptcy

One of the biggest impacts of declaring bankruptcy is the hit your credit score will take. On average, personal bankruptcy filings cause a credit score to drop by 130-150 points. For example, someone with a pre-bankruptcy score of 680 could see their score fall into the low 500s after the bankruptcy discharge.

The damage to your credit score happens because the bankruptcy gets added to your credit report and shows up in your payment history. Since payment history makes up 35% of your FICO credit score calculation, the bankruptcy filing heavily weighs down that important factor.

After bankruptcy, it usually takes a minimum of 2 years before you can get back up to a “good” credit score range of 660-699. Recovering to a “very good” score between 700-749 can take around 5 years after bankruptcy. The closer your starting score was to “excellent” before bankruptcy, the longer it may take to fully rebound back to that 850+ range.

The most important thing is to consistently make on-time payments and keep credit card balances low after bankruptcy. Having positive payment histories and low credit utilization will help lift your post-bankruptcy credit score over time. But patience is required, as it can take 7-10 years to fully recover an excellent 800+ credit score.

 

Getting Pre-approved for Auto Financing

Getting pre-approved for an auto loan before visiting dealerships can greatly improve your chances of securing financing with reasonable rates and terms after bankruptcy. Here are some tips for getting pre-approved:

 

  • Research lenders that actively work with customers who have recently filed bankruptcy. Credit unions and specialized subprime lenders are often more willing than major banks.
  • Submit loan applications and all required documents to these lenders in advance. Be upfront about your bankruptcy history.
  • If approved, you’ll receive a pre-approval letter stating the maximum loan amount and rate you qualify for.
  • Bring this pre-approval letter when shopping for a vehicle. It shows dealers you already have financing, strengthening your negotiating position.
  • Having an auto loan pre-approval also speeds up the final loan process at the dealership.

 

Taking the time to get pre-approved makes the post-bankruptcy car buying experience much smoother. The pre-approval letter demonstrates you are serious buyer, and many dealers will be willing to work with you to secure appropriate financing and get you driving again.

 

Interest Rates Will Be Higher Than Average Post-Bankruptcy

One of the biggest challenges of getting a car loan after bankruptcy is that interest rates will be significantly higher than average. Where most borrowers with good credit can qualify for rates around 5-7% on a new auto loan, someone with a recent bankruptcy will often see rates upwards of 10-15% or even higher from subprime lenders.

The higher interest rates are the way lenders offset the increased risk posed by lending to borrowers with bankruptcies and other credit challenges. By charging a higher rate, they can recoup more of their investment over the life of the loan.

While the high rates may seem unfair, it’s important to remember that any loan after bankruptcy is a privilege. By making all your payments on time and continuing to rebuild your credit, you can qualify for lower rates in the future. But immediately following bankruptcy, interest rates above 10% are very common.

One way to get the rate down is to opt for a shorter loan term. For example, accepting a 3-year loan instead of 5-6 years. The monthly payment will be higher with the shorter term, but the overall interest paid over the life of the loan will be lower.

 

Chapter 4 – Down Payment

One of the biggest hurdles to securing auto financing after bankruptcy will be coming up with a sufficient down payment. Since lenders view you as a high-risk borrower following bankruptcy, most will require you to make a sizeable down payment on your next vehicle purchase.

The down payment serves a few important purposes from the lender’s perspective. First, it reduces their risk exposure on the loan by ensuring you have “skin in the game”. If you were to default again, a 20% down payment gives them a valuable equity cushion on repossessing and reselling the vehicle. Secondly, the larger down payment lowers your requested loan amount, meaning the lender has less money at stake overall if the loan does go south.

As a general guideline, you can expect lenders to look for a minimum down payment in the 10-20% range on a post-bankruptcy auto loan. Some may require as much as 25-30% down for approval. Coming up with this large of a down payment can be challenging, especially when your savings may have been depleted from the bankruptcy itself.

Begin saving whatever you can well in advance of needing a new vehicle. Consider selling assets like recreational vehicles, boats, or a second car to come up with the down payment funds. You may also need to adjust your budget temporarily to direct more money into savings. Taking these steps will greatly improve your chances of getting approved for financing.

 

Chapter 5 – Loan Term

One of the biggest factors that determines your monthly car payment is the length of the auto loan term. The longer the term, the lower your payment will be since the loan amount is spread out over more months.

For borrowers with good credit, 5 or 6 year loans are common. But after bankruptcy, most lenders will only approve shorter 3 year terms. By shortening the repayment period, the lender reduces their risk.

Even though 3 year loans mean higher monthly payments, it can be worth accepting to get approved and score a lower interest rate. For example, you may qualify for a 9% rate on a 3 year loan, compared to 12% over 5 years.

While not ideal, the higher monthly payment over fewer years is often the compromise you need to make post-bankruptcy. The good news is you can potentially refinance into a longer term later once you’ve built your credit back up by making timely payments.

 

Chapter 6 – Co-Signer

Having a co-signer can help offset the risk for the lender when trying to get approved for a car loan after bankruptcy. A co-signer is someone with good credit who agrees to be equally responsible for repaying the auto loan. This gives the lender an additional layer of assurance that the loan will be repaid on time.

If you can get a family member or trusted friend with strong credit to co-sign on your auto loan, it shows the lender you have someone standing behind you financially. This can help increase the chances of getting approved and may also result in a lower interest rate.

Just keep in mind that being a co-signer is a big responsibility. Make sure you only ask someone who understands the risk involved and trusts you completely to make the monthly payments. If the payments fall behind, it can negatively impact their credit too. Also have a plan in place to refinance the loan into your own name once your credit is reestablished in 1-2 years.

Having a co-signer demonstrates you have a support system in place and aren’t tackling the auto loan entirely on your own post-bankruptcy. Many lenders look favorably at applications with a co-signer when approving car loans after bankruptcy.

 

Chapter 7 – Trade-in

Trading in your current vehicle when purchasing a new one after bankruptcy can help lower your monthly payments. When you trade-in, the value of your trade is applied as a down payment on the new vehicle, reducing the amount you need to finance.

However, this strategy does come with some caveats. If you still owe money on the trade-in, that balance will be rolled over into the new auto loan. This is called having “negative equity” – when you owe more on a vehicle than it’s worth. Trading in a vehicle with negative equity means you’ll be financing more than just the purchase price of the new car.

Before deciding to trade-in, carefully consider the following:

 

  • How much do you still owe on the trade-in?
  • What is the car’s estimated trade-in value?
  • Will the negative equity be more than any savings from lower payments?

 

While trading in can help lower your payment, it’s not always the best strategy if it means rolling in a lot of negative equity. That extra debt can outweigh any monthly payment savings. Crunch the numbers carefully before committing.

 

Chapter 8 – Buy Here Pay Here

One option for getting a car loan after bankruptcy is to go through a buy here pay here (BHPH) dealer. These dealerships specialize in approving customers with poor credit by financing vehicles themselves rather than going through a third party lender.

The main advantage of BHPH lots is they are more likely to approve you quickly without requiring a down payment. They understand customers with bankruptcy need transportation and are willing to take on the risk.

However, interest rates at BHPH dealerships tend to be much higher, often exceeding 20% APR. They also usually install GPS tracking devices on vehicles so they can locate and repossess if payments are missed.

Additionally, the vehicle selection at BHPH lots is limited to older used models, usually with high mileage. But when your options are scarce post-bankruptcy, these dealerships provide an important financing option.

Just be sure to compare interest rates and shop around, as some BHPH dealers are more predatory than others. Getting pre-approved by your bank or credit union first can strengthen your negotiating position.

While not ideal, BHPH dealerships fill an important role in providing bankruptcy-discharged customers with a second chance at financing a vehicle.

 

Chapter 9 – Leasing

Leasing a car is another option to consider after bankruptcy. While leasing is generally more expensive in the long run compared to purchasing, it can provide lower monthly payments in the short term. This may make leasing more affordable if money is tight post-bankruptcy.

When you lease, you only pay for the vehicle’s depreciation during the lease term plus rent charges, rather than the entire purchase price. For example, leasing a $30,000 car for 3 years with a $3,000 down payment might result in monthly payments around $250. Buying that same $30,000 car with $3,000 down over a 5-year loan at 10% interest would equal around $530 per month.

The downside is that after the lease ends, you have to either purchase the vehicle if you want to keep it, lease another vehicle, or return it. So leasing results in a perpetual car payment unless you eventually buy the car outright. Still, leasing can be a viable short-term option as you work to reestablish your credit and get back on your feet financially after bankruptcy.

Some tips for leasing after bankruptcy:

 

  • Shop around for lease specials and negotiate the best deal.
  • Put down as much money upfront as you can to lower the monthly payment.
  • Stick to shorter 24-36 month lease terms to start.
  • Pay your lease payment on time each month.
  • Try to buy the vehicle when the lease ends if you can afford it.

 

While leasing is generally more expensive long-term, it can provide an affordable monthly payment option as you work to rebuild your credit post-bankruptcy. Just be sure to budget for the perpetual car payments leasing often requires.

 

Chapter 10 – Repaying Responsibly

After you’ve secured financing and purchased your vehicle, it’s critical to repay your auto loan responsibly. This will help rebuild your credit and improve your chances of getting approved for future loans at better rates.

The most important thing is to make your monthly payments on time each month. Set up automatic payments or put payment due dates in your calendar so you never miss a payment. Every on-time payment will be reported to the credit bureaus and show lenders you can handle credit responsibly.

When possible, make payments that are larger than the minimum due. Making extra principal payments allows you to pay off your loan faster and save on interest charges over the long run. Even an extra $20 or $50 can make a difference. Automate these additional payments so you don’t forget.

Sticking to your loan agreement and paying diligently will demonstrate to future lenders that you’ve changed your financial habits for the better. This will open up more affordable financing options as you continue to rebuild.

 

Chapter 11 – Refinancing

After making on-time payments on your car loan for 1-2 years, you may be in a position to refinance your auto loan at a lower interest rate. As you re-establish positive payment history, your credit score should gradually improve. Many lenders will consider refinancing an existing car loan once you have 12-24 months of on-time payments.

To qualify for refinancing, you will likely need a credit score of at least 600 and show consistent income. Refinancing could lower your interest rate significantly, potentially saving you hundreds or even thousands of dollars over the remaining loan term. You can contact your original lender to discuss refinancing options or shop around with other lenders to compare offers.

When applying to refinance, be prepared to provide proof of income, recent pay stubs, your improved credit report, and evidence that you’ve paid your existing car loan on time. Refinancing too early could result in higher rates, so be patient and wait at least a year before applying. With diligent payments and improving credit, you can refinance your high-rate post-bankruptcy car loan to much better terms.

 

Chapter 12 – Alternate Transportation

If you’ve been through bankruptcy and are having difficulty securing a car loan, exploring alternate transportation options can provide you with mobility while rebuilding your credit.

 

Public Transit

Most major cities and many smaller towns have public bus systems that can be an affordable way to get around. Monthly and annual passes often offer big discounts compared to paying per ride. Many bus systems now have mobile apps and real-time tracking to make using public transit easier.

Subways, streetcars, and commuter trains are other forms of public transit to consider if available in your area. These can be quick and efficient ways to commute to work or travel around the city.

 

Car Sharing

Car sharing services like Zipcar allow you to rent vehicles by the hour or day without a long-term commitment. After joining, you can reserve and unlock cars using your membership card and an app. Rates generally include gas and insurance to simplify the process.

While more expensive than owning for frequent driving, car sharing gives you access to vehicles without having to secure financing. It provides an alternative to car ownership while you work on improving your credit.

Ride sharing services like Uber and Lyft are another option, though the costs add up quickly for regular use. Public transit combined with occasional ride sharing is often the most budget-friendly approach.

Exploring alternate transportation while rebuilding your credit can give you the mobility you need at a reasonable cost. Once your credit score has improved in a year or two, you’ll be in a much stronger position to qualify for a car loan.

 

Conclusion

Getting approved for a car loan after declaring bankruptcy in Canada is very achievable with the right preparation and approach. Here are some key takeaways from this guide:

 

  • Check your credit report and focus on re-establishing positive payment histories before applying.
  • Having a significant down payment and co-signer can help offset any perceived lending risk.
  • Be prepared to accept higher interest rates around 10-15% and shorter 3 year loan terms at first.
  • Shop multiple lenders and negotiate the best possible rates for your situation.
  • Making payments on-time and keeping your utilization low will help improve your rates over time.
  • Consider all options, including leasing, trade-ins, and alternate transportation if needed.

 

While it requires some patience, getting approved for auto financing after bankruptcy is very possible. Use the strategies in this guide to set yourself up for success. With time and responsible payments, you can rebuild and regain access to prime rates down the road.

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Questions About Getting a Car Loan After Bankruptcy

Yes, you can get a car loan in Canada after bankruptcy. However, it may be more difficult and you will likely pay higher interest rates. Most lenders will want to see that you have reestablished good credit for 6-12 months after your bankruptcy before considering you for a loan. Shop around for lenders that specialize in loans after bankruptcy. Expect to make a larger down payment as well. Maintaining payments on time will begin improving your credit.



Most experts recommend waiting at least one year after your bankruptcy discharge before applying for a car loan in Canada. This allows some time for your credit to start recovering. While it is possible to get a car loan 3-6 months out, interest rates may be over 20%. Waiting longer, like 18-24 months, gives rates more time to decrease to under 10% for a used car.




You can get a car loan in Canada with a credit score as low as 500-550 after bankruptcy. However, interest rates will be higher with lower scores. Scores of 600+ after bankruptcy will qualify for interest rates around 10-15% from subprime lenders. The higher you can get your score over 650+ before applying, the better rate on a used car purchase.



 

Some of the best options for car loans after bankruptcy in Canada include:

 

– Fairstone Financial: Offers auto financing to borrowers even soon after a bankruptcy

Rifco National Auto Finance: Specializes in providing auto loans to those rebuilding their credit

– Cars on Credit: Works with customers discharged from a bankruptcy to help them get into vehicles

– AutoLoans.ca: Matches borrowers to lenders offering car loans after bankruptcies

 

These subprime lenders are more flexible on credit requirements after bankruptcy compared to traditional banks and creditors.



A secured car loan is usually the best option immediately after bankruptcy in Canada. This means the vehicle you purchase serves as collateral for the loan. Secured loans typically have lower interest rates versus unsecured loans. Unsecured loans rely only on your creditworthiness. Wait at least 18 months after bankruptcy with good payment history before applying for an unsecured car loan in Canada.



When applying for a car loan in Canada after bankruptcy, have these documents ready for potential lenders:

 

– Proof of income – recent pay stubs, tax returns

– Proof of residence – utility bills with current address

– Down payment if required

– Copy of bankruptcy discharge papers

– Any proof of current credit accounts open and in good standing

– References from employer, landlord, etc.

 

Having paperwork ready speeds up the auto loan application decision after your bankruptcy.



 

Yes, having a co-signer when trying to get a car loan after bankruptcy in Canada can improve your chances tremendously. The co-signer agrees to be responsible for repaying the auto loan if you can’t make payments. Choose a co-signer with a long credit history and high income. If you get a co-signer, make sure to make all your payments on time going forward.




Immediately after bankruptcy in Canada, expect average used car loan interest rates to range between 15-20% from subprime lenders who work with bad credit. For new cars, rates can be 18-25% after bankruptcy. However, within the first year of diligent payments, scores rebound somewhat lowering average interest rates to 10-15% on a used car purchase after bankruptcy.



 

 

It is generally better to buy a used car versus new after filing bankruptcy in Canada. Used car loan rates tend to be lower interest rates compared to new cars for those recovering their credit. Aim for a used car under 5 years old that retains a portion of the factory warranty protection to avoid expensive repair bills as you rebuild credit.



When buying a car in Canada after bankruptcy, it is best to keep the purchase under $10,000 total. Focus on finding the most reliable used car possible in that lower budget range. This keeps loan amounts and interest charges lower as you work on improving credit over the next few years. Avoid overextending finances right after bankruptcy with a high car loan amount.

Yes, taking 6-12 months to rebuild your credit before applying for a car loan after bankruptcy in Canada can save substantially on interest charges. Get secured credit cards. Keep credit card balances extremely low. Avoid missing payments on any credit accounts. Check credit reports and resolve errors. Lenders like to see 12+ months of on-time payments after bankruptcy before approving reasonable interest rates.



Those with bad credit due to bankruptcy can find some of Canada’s best car loan lenders specializing in second chance financing at these websites:

 

– CarLoansCanada.ca

– AutoCreditExpress.ca

– CarHelpCanada.com

– ApplyCarLoans.ca

– BadCreditCarLoans.ca

 

These sites allow you to complete one online application form which they submit to their network of subprime lenders across Canada to find you the best auto loan rates.



While 0-9% down payments may be advertised, realistically plan on a 10-20% down payment requirement for most car loans obtained in Canada after bankruptcy. The higher the down payment you can make, the better the loan terms and interest rate will be. Work on saving up as much as possible for a down payment while rebuilding credit.

Take these steps to improve your chances of getting approved for a car loan in Canada at better rates after bankruptcy:

 

– Save up for a larger down payment of 15-20%

– Wait at least 12 months after discharge before applying

– Keep secured credit card limits low and balances lower

– Get a co-signer with excellent credit history

– Show consistent, reliable income sources

– Provide proof of auto insurance ahead of time

 

Following a debt management plan shows lenders you can now manage borrowing responsibly.




If you filed a consumer proposal or Chapter 13 bankruptcy in Canada requiring payments, wait until fully discharged to apply for auto financing. Most lenders shy away from additional loans if you are still repaying debt under an active bankruptcy proposal. Once fully discharged, follow steps to rebuild credit for 6-12 months before car shopping.

If you cannot qualify for a car loan yet after bankruptcy in Canada, consider these alternative transportation options until you reestablish your credit further:

 

– Buy an older used car with cash

– Finance a less expensive vehicle with a “buy here pay here” dealer

– Lease a car which may have lower credit requirements

– Use public transportation for a longer period

– Continue driving a vehicle you owned before bankruptcy

 

After another 6-12 months of perfect payment history, try securing a car loan again.



A Chapter 7 bankruptcy in Canada has the biggest negative impact on your future ability to get approved for a car loan compared to other bankruptcy options. Under a Chapter 7, all dischargeable debt is wiped out entirely. Follow the steps above to rebuild credit slowly over 12+ months before trying to finance vehicle purchases after bankruptcy.



Yes, once your bankruptcy no longer appears on your credit report in Canada, usually around the 6-7 year mark, you can expect interest rates on a car loan to decrease notably. Most car loan lenders only look back a few years to assess loan risk and determine rates. So once the actual bankruptcy notation is removed, better rates should be widely available.



Those with bad credit due to bankruptcy can find some of Canada’s best rates on car loans at these websites:

 

– CarLoansCanada.ca

– CanadaDrives.ca

– AutoCreditExpress.ca

– CarHelpCanada.com

– CanadaAutoFinance.com

 

Rates at these sites typically beat those of traditional banks and dealerships for high-risk borrowers. Completing the quick application form allows you to compare loan offers from multiple subprime lenders to find the lowest car loan rates in Canada after rebuilding credit for 6-12 months post-bankruptcy.

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