Is it Better to Buy or Lease a Car After Bankruptcy?
If you want to get approved at the best possible terms when buying a car, it's important you know a car lender's credit guidelines before you apply for credit … especially if you're bankrupt.
It will save you time and frustration – but more importantly, it will help you avoid credit inquiries that may lower your FICO credit scores up to 12 points per inquiry.
Step 1 in making a lease or buy decision is to determine a lender's credit guidelines.
You start by asking if they lend to people with a bankruptcy. If so, on what terms?
That's right. You have to be upfront that you've filed bankruptcy. Do not hide it. We have to face the fact that some dealers just will not work with people who've filed bankruptcy. So our job is to find the ones that do.
Some lenders will only lease to people with a bankruptcy. Others will only offer purchase financing. Yet still others will only lend using a hybrid of the two – this is especially common in Texas.
Ask the finance director at the dealership to direct you as to what structure the manufacturer prefers.
And here's a quick tip for you: if your bankruptcy does not appear on the credit report your lender pulls – then, in the eyes of the lender, you're not bankrupt.
The only lenders I would consider using are:
– First choice: Captive lenders (car manufacturers)
– Second choice: Banks (not finance companies)
– Third choice: Credit unions
Ninety-nine percent of the cars I've rented over the years have been with captive lenders. Just one was leased by a bank.
That particular deal came from a conversation I had with Amy, the finance manager at the local Land Rover dealership here in Indianapolis. I told her I was open to her financing recommendations, but I preferred funding through the car manufacturer.
I told her my current FICO scores. She immediately said that with my scores she could do better through a local bank. I signed a credit application and told her to go for it.
The next day I signed a lease agreement with that local bank. Being open to her advice literally saved me hundreds of dollars a month on that car.
So be flexible … but be careful. It seems most car dealers call all of their funding sources banks. When in reality some are banks, some are credit unions, and most are sub-prime finance companies.
Here is a list of some of the most commonly used sub-prime auto finance companies:
1. HSBC Automotive
4. WFS Financial
You want to pass on the sub-prime finance companies – unless you have exhausted all other options. Sub-prime lenders should be your last resort.
And only use credit unions if they report to all three national credit reporting agencies. How do you find out if a credit union reports to all three credit reporting agencies?
Simple – you ask. Ask the branch manager at the credit union if they report. And after you get the loan, check all three of your credit reports and make sure their trade line appears on each one.
The three worst luxury captive lenders to lease or purchase from after bankruptcy are:
The three worst mainstream captive lenders are:
What makes these the worst?
Once these lenders see that you've filed bankruptcy, they are less likely to work with you. However, if they are willing to work with you, they'll want you to be at least several years from discharge and have perfect credit during that time.
Now that I told you how bad the above six lenders are – there are times where they may offer you good deals. For example, if one of the above happens to be the largest dealer in your area, they may be able to offer you special deals that a smaller dealer can not.
Of course, things change all the time with captive auto lenders. They change their credit guidelines on a whim to meet their own financial goals. So, it's always a good idea to at least research these dealerships – just do not get your hopes up too high.
OK, so you've done your research and narrowed down your choice to one or two car manufacturers.
Step 2 in making a lease or buy decision is to purchase your FICO credit scores.
It's important that you have your most recent scores when you talk to car dealers (just like I did with Amy). It puts you in charge.
When you enter a dealership with your FICO scores, the dealer will know you're more informed consumer and can not be taken advantage of. Just know that the FICO credit scores auto dealers use are a little different than what we see as consumers. The scores the dealers review are called FICO Auto Industry Option Scores. The good news … these FICO scores may be higher than your normal FICO scores if you paid all previous auto loans as agreed.
Some car dealers have told me that if your FICO scores are higher than the scores the dealer reviews – they may even use your scores to get a better deal.
You can buy your scores from myFICO.com.
Step 3 is to interview the remaining car dealers on a defect level.
Start by asking them these questions:
– Which credit reporting agency do you use to make a lending decision?
– What is your minimum credit score requirement to get approved?
– What credit score is needed to get the best interest rate?
– Do your lenders prefer offering lease or purchase financing to a bankrupt debtor?
– What incentives are there to lease or purchase right now?
At this point it's important to remain open to either leasing or purchasing. Evaluate your options and incentives. Remember, you're buying the financing. In other words, the most important factor is the willingness of the lender to loan you money.
I personally view the lease versus buy decision in three ways:
1. If you're recently recovering from bankruptcy, the only thing that matters is if you can get approved at an interest rate you can afford through a lender that reports to all three national credit reporting agencies. So you should only consider lenders that are bankruptcy friendly.
2. Once your credit scores begin to increase, you can start selecting cars based on which credit reporting agency the lender uses to determine if you qualify. Obviously, you should choose the lender who uses your highest FICO credit score to make a lending decision.
3. When your scores are high enough … or two years have passed after your bankruptcy … or your bankruptcy does not appear on the credit report the lender uses, then you can choose almost any car you like. But make sure you still do your research and use your credit scores to help you compare interest rates, terms and incentives.
Can I Buy a New Car While In Chapter 13 Bankruptcy?
Tobias Licker, Esq.
When you trade-in you still would need permission from the court and the old lender would have to agree to release his lien.
After you trade in your car or sell it, your attorney will need to object to the claim filed by your creditor in your bankruptcy case because otherwise your creditor will continue to receive monthly payments from the trustee.
Trading in your vehicle before filing for bankruptcy.
St. Charles: 1861 Sherman Dr, St. Charles, MO 63303 (at Hwy 94 and Hwy 270, next to Restaurant Ginghams)
South & Jefferson County: 7321 S. Lindbergh Ave., St. Louis, MO 63125, Suite 222 (at the corner of Linderbergh and Lemay Ferry Rd, across from the South County Mall, inside the Lindergh Building, by appointment only)
St. Louis: 3470 Hampton Ave., Suite 101, St. Louis, MO 63109 (close the Hampton and Chippewa, by appointment only)
Florissant: 1281 Graham Rd., Suite 300, Florissant, MO 63031 (at Hwy 270 and Graham Rd/ N. Hanley Rd, inside First Bank Building, third floor, by appointment only)
Granite City: 3600 Nameoki Rd, Suite 201, Granite City, IL 62040 (across from Shop'n Save, inside First Bank Building, second floor, by appointment only)
Buying a Car after Bankruptcy: Misconceptions vs. Reality
Many people go through financial setback during the course of their life. While some may suffer from a bad credit score, others become a victim to bankruptcy. Usually, a person faces either chapter a 7 bankruptcy or a chapter 13 bankruptcy. A chapter 13 bankruptcy is for debtors who can repay a certain portion of their debt with the help of a repayment plan. On the other hand, a Chapter 7 bankruptcy is useful for debtors who possess little or no disposable income and wish to get rid of their excess unsecured debts.
Many people who file for bankruptcy think it is impossible to obtain additional financial assistance. Misconceptions cloud their thinking and it sways them from the real scenario. However, with the help of certain guidelines and the right mindset, you can obtain an auto loan for buying a car
Buying a Car and Bankruptcy: Common Misconceptions to avoid
1) Misconception: I will not be eligible for an auto loan after bankruptcy.
Reality: Bankruptcy may be a temporary halt but it is not the end of your financial journey. The common misconception is that a person suffering from bankruptcy will not get approval for any loan. However, the reality is different. A bad credit auto loan is the best option available to individuals with bankruptcy. The probability of obtaining approval for a bad credit auto loan increases as the loan is designed for individuals with credit issues. Thus, put your efforts in researching for lenders who provide bad credit auto loans and getting your dream car will not seem like a distant dream.
2) Misconception: Bankruptcy ruined my credit score. Improving it is a challenge.
Reality: A credit score is made up of numerous factors such as the types of credit, amount of your debt, credit history and payment history. The situation of bankruptcy helps you to eliminate most of the elements that create a negative impact on your credit report. Additionally, the debt-to-income ratio of people after bankruptcy is better than the one prior to bankruptcy. Therefore, obtaining an auto loan is a chance to improve your credit score provided you make the payments on time.
3) Misconception: My purchase options are limited to used cars.
Reality: While it is advisable to be calculative in making future financial decisions, the options of purchasing the types of cars are not limited. A person who recently suffered bankruptcy is open to purchasing new cars as well as old cars. The best alternative to a used car is a discontinued car model. Purchasing a discontinued car model helps you to obtain a new car for a budget-friendly amount. Also, the car dealers are eager to sell the discontinued car model to free their shelf space. Therefore, a discontinued car model will help you stay in your budget and allow you to get your hands on a new car.
Today, bankruptcy does not carry the negative stigma that it carried two or three years ago. Many lenders are aware that bankruptcy occurs due to business failure, decrease in income, loss of a spouse or any other unexpected crisis. Yet, misconceptions occupy the minds of people and force them to avoid applying for an auto loan. However, with a little market knowledge, enough courage and the right mindset, you can get one step closer to the car of your dreams.