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Bankruptcy And Car Finance - What Should You Know?

Bankruptcy is not an ideal state you would like to find yourself in. If it has found its place in your credit report, of course, your borrowing capacity is no longer the same as it was before. However, there is still a good chance you will be able to qualify for an affordable deal, but the question is when?

Bankruptcy is a state of being badly off to the extent that you are officially declared to be unable to pay off what you owe, and hence, your assets are sold to pay off your debts. Declaring bankruptcy is a last resort to deal with your debts when you cannot keep up with payments.

It is a big decision that cannot be taken hastily. Even though you are up to your neck in debt and cannot handle it anymore, you should consult your financial consultant once it can affect your financial future.

Your financial counsellor can suggest you other relief plans, such as debt management plans and debt relief orders. However, there are some situations when bankruptcy seems to be the best bet.

1. Is it possible to get car finance during bankruptcy?

You will be discharged from bankruptcy within 12 months. It is unlikely to qualify for guaranteed car finance for bad credit in the UK. No lender will entertain your application if your bankruptcy is not discharged. It is apparent that you are an extremely risky borrower as you are already struggling to pay off your current debts.

Further, your receiver might restrict you from applying for a new loan unless the recovery from your estate is complete. No lender will go beyond this rule. In some cases, the lending in such a scenario can prove to be absolutely void.

It can be scary, but there is nothing to worry about, as this process will not continue forever. Once you are free from it, you will be eligible to apply for a personal loan. Bear in mind unless you are discharged from bankruptcy, you will not be able to apply for even small emergency loans, such as a guaranteed loan with a high acceptance rate.

2. Are you able to apply for car finance after your bankruptcy is discharged?

Once your bankruptcy is discharged, you are absolutely free to apply for any loan, including car finance. However, it is not as easy as it seems. This is because it will show up on your credit report and will continue to appear for six years. It can be extended if your discharge period is also extended.

When you apply for a car loan, your lender will look over your credit report to determine your credit score. They will get to know your bankruptcy. Since it is clear that you have faced some financial problems keeping up with your debt payments in the past, they will likely perceive you as a risky borrower. They might be hesitant to sign off on it.

Car loans are such small loans. The payments are made over a period of time in monthly instalments. Lenders will have concerns about your repaying capacity because of high-interest payments. Your credit score will be worse, which means you will be imposed higher interest rates. It can be quite complex for you to be able to keep up with payments. In addition, a few lenders can also put a restriction on the borrowing sum. As a result, you will have to arrange a higher deposit for your car.

3. How do you get the best car finance deal after bankruptcy?

Even though you can apply for a car loan after your bankruptcy is discharged, you will have a few options. Most of the lenders will refuse you, and if they give the nod, they will charge very high-interest rates. So, the deal you are offered might not be affordable.

Therefore, it makes sense to do up your credit score. The higher the credit score, the better the interest rates will be. Here is how you can improve your credit profile:

  • You should pay off your bills on time. Do not miss the rent payments either. Utility bills should not be ignored. Though their payments do not amount to much, missed payments will increase the burden on your budget.
  • Use cash as much as possible if you cannot maintain a credit card balance that is lower than 30%.
  • Check your credit score periodically because identity theft can be a reason for your poor credit rating.
  • Do not max out your credit card balance. Try to keep your debt-to-income ratio up to 25% to 30%, and it also includes your credit utilisation ratio. Avoid overdrafts. Instead, create an emergency cushion to fall back on in case unexpected expenses crop up.
  • Limit new credit applications.
  • Apply for a credit builder loan because these loans will help build your credit rating. They can be lightly expensive, but you can get rid of them within six months.

In addition to fixing your credit report issues, you should try to fill in some gaps. Try not to apply for a new loan or a credit card unless it has been a year since your bankruptcy was discharged. Your credit score cannot be good as long as there is bankruptcy in your profile. Your payments will just show that you are a responsible borrower, but despite that, you will get high-interest rates.

The benefit of putting some gap is that your lender will not stress your previous defaults and bankruptcy while making a decision. As a lending decision is not solely based on your credit rating, you are more likely to get a car finance deal at a lower interest rate.

To sum up

It is all but impossible to get car finance during bankruptcy. However, there are chances to qualify for these loans when your bankruptcy is discharged. Interest rates will be high, so try improving your credit score and put some time gap between bankruptcy discharge and application for a car loan.