Bankruptcy and Auto Loans

Many Canadian individuals and businesses declare bankruptcy at one point in their lifetime. Often faced with few alternatives, people who declare bankruptcy seek relief from overwhelming debt. Canadian individuals and businesses filed a combined total of 47,924 insolvencies in 2021 thus far, and 15,592 of those insolvencies were bankruptcies. 

After filing for bankruptcy, you won’t access the same loans, loan terms, or interest rates as you did before you filed. And, bankruptcy remains on your credit report for six years. 

Of course, there are many ways to rebuild your credit, such as making monthly payments on existing debt. However, that usually takes a bit of time. What if you need a motor vehicle to go to work, or to pick up your children? Luckily, car loans after bankruptcy exist and aren’t hard to find! 

Can You Keep Your Car After Declaring Bankruptcy?

You might associate bankruptcy with government officials taking all of someone’s valuables, including their house. But, there are certain things you can keep even throughout a bankruptcy. For example, you might be subject to special conditions if you receive compensation for registered trademarks. 

Or you might be able to keep a car as long as it’s worth an amount consistent with a certain threshold. For example, in Ontario, you can keep a car as long as it’s worth no more than $7,117. There might also be other conditions, such as a demonstrated need for the car. If you’re undergoing bankruptcy, talk to your Licensed Insolvency Trustee (LIT) for more information about exemptions. 

Where Can You Get a Car Loan After Bankruptcy?

Unfortunately, type A lenders like banks aren’t likely to lend to you after you’ve declared bankruptcy. You’ll find easier access to secured debts than unsecured debts, however. But, even though auto loans are secured debts, banks will still hesitate to offer you any loan. 

Many other private companies provide financial services, including loans for people with poor credit. Your best bet in finding a car loan after bankruptcy is through either:

• An alternative lender
• A car dealership

Remember, an auto loan from an alternative lender usually has higher interest rates and less favourable loan terms. But, you can always discuss refinancing and renegotiate interest throughout the term of the loan. 

Some alternative lenders and dealerships that offer auto loans in Canada are Loans Canada, Canada Drives, and CarLoans411. 

Pros and Cons of Getting a Car Loan After Bankruptcy

Here are a few pros and cons to consider before getting a car loan after bankruptcy. 

Pro #1 – Rebuild Your Credit

After a bankruptcy, you might hesitate to take out another loan. However, as long as you can afford it, loans are a great way to rebuild your credit. Your lender records your timely payments and shares that positive credit information with the credit bureaus. 

Pro #2 – Vehicle Ownership

Not many loans offer you ownership of an asset upon completion. You might get a great interest rate on a special line of credit or credit card, but your money is gone after you spend it. With an auto loan, you invest your money into an asset. If you complete the loan term successfully, you’ll have a car that’s completely your own!

Con #1 – Depreciating Asset

Although you’ll have a car that belongs to you after paying off the car loan, it won’t be worth as much by then. This is because cars are one of the fastest depreciating assets, losing 20% of their value within one year, and 40% after five years. Knowing this, you might consider obtaining a car loan for a used car instead of a brand new car.  

Con #2 – Higher Interest

After bankruptcy, lenders won’t charge you the same interest rates as used to. Remember, a lender takes on a certain amount of risk when lending to someone with poor credit. So, the lender makes up for that risk with higher interest rates. Even with a longer loan term and smaller monthly payments, higher interest rates mean that you’ll pay more for the loan over time. 

Con #3 – More Debt

You might need a car to get from place to place; however, make sure that need surpasses the risk of acquiring more debt. After bankruptcy, taking on too much debt can plummet your credit score even more if your credit utilization ratio increases too much. 

Preparing For An Auto Loan After Bankruptcy

After bankruptcy, you can find many different auto loans from different lenders. First, however, consider these tips before pulling the trigger:

Save Up For a Bigger Down Payment

The bigger your down payment, the better your application. If you have a bit of time on your hands, try to save up for a larger down payment. This will help your application seem less risky to the lender, and result in lower monthly payments. 

Rebuild Your Credit

If possible, take a few months to a year to rebuild your credit. Even if you only increase your credit score slightly, it might help your application. Taking time to rebuild your credit before applying for a car loan might help you secure a lower interest rate and better loan terms. 

Check Your Credit Report

After declaring bankruptcy, your credit report and score won’t look stellar. However, human beings operate credit bureaus, and human beings have a capacity for error. So check your credit report every year, especially before applying for a loan, to ensure there aren’t any inaccuracies bringing down your credit score. If you notice anything suspicious, you can resolve it with the credit bureau before having a lender see the negative mark. 

Compare Lender Rates and Terms

Most car dealerships have relationships with 20+ different lenders to help their clients find financing. And, many alternative lenders lend without going through a dealership.

Suffice to say that as a borrower, you have many lenders to choose from. And with the variety in lenders, you also have many different loan types, rates, and terms to sift through. So make sure you spend some time shopping before committing to an auto loan lender.

Bankruptcy and auto loans are not the most compatible things. However, getting an auto loan after bankruptcy is possible. Just remember you’re probably not going to get good finance rates. Research the market and see what’s out there. You might even consider using that research to leverage your negotiation with a lender.