What Are Your Credit Options After Bankruptcy?

3 December 2014
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If you've recently undergone a bankruptcy, foreclosure, or other credit-damaging event, you may be concerned about your ability to qualify for loans in the future. The good news is that this temporary dip in your credit score won't last forever -- and even while you're in the credit rebuilding process, there are loan options available. Read on to learn about several credit options available to individuals with poor credit, as well as ways to improve your credit score to qualify for future offers.

How can you purchase a new (or used) vehicle with bad credit?

A car loan is one of the first loans you should be able to qualify for after a negative credit event. Because cars themselves can serve as collateral for the loan, there is little risk to the lender, even with poor credit -- if you stop paying the loan, the lender can seize the vehicle and have it sold to pay any outstanding balance. In some cases, particularly those of dealer finance, the dealer will apply a small GPS device to the vehicle so that it can be easily tracked and seized after the first payment is missed.

  • Dealer finance

Many auto dealers offer their own financing programs to a larger population of applicants than those who qualify for traditional bank financing. Although the terms of dealer financing generally involve higher interest rates than bank financing, these loans are also available for longer terms, making the monthly payments more affordable.

  • Cosigning

If you're unable to obtain dealer financing (or are uncomfortable with the terms of this financing), another option may be to have a friend or relative with good credit cosign for your loan. By cosigning, this person is also making a promise to pay the loan, allowing the bank to seek payment from the cosigner if you stop making payments. However, cosigning often allows you to qualify for better rates or terms than you'd qualify for using your own credit, and can also help improve your credit score.

If you do choose this option, you may consider taking out a small disability or life insurance policy in the amount of the loan, payable to the cosigner -- this will ensure that the cosigner has sufficient resources to pay off the loan in the event of your disability or death.

How can you improve your credit?

Even if you've been able to obtain an auto loan with bad credit, you likely want more credit options in the future. Improving your credit score and adding positive transactions to your credit report can help expand your credit options, and can even lower your insurance rates. Although your credit score can slowly improve on its own once a few years have passed since your foreclosure, bankruptcy, or late payments, there are several ways to speed this process.

  • Apply for a low-limit credit card
    • Even after bankruptcy, you should be able to apply for a credit card with a very low limit. This credit card may have high interest rates, but to the credit companies, you are a safe risk, as you won't be able to declare bankruptcy again for many years.
    • After you've received a card, charge a few regular expenses on it and pay it in full each month. This will show a steady track record of responsible credit usage and timely payment.
  • Investigate secured credit cards
    • If the idea of access to credit still makes you uneasy, you may be more comfortable with a secured credit card. This card acts more as a debit card, and must be periodically loaded with money -- however, the credit issuer still reports to the national credit agencies. These cards also have no risk of overdrafting or making late payments.

For more information about getting a loan with bad credit, you can go to sites of local credit companies or car dealers.