From a client’s perspective, one of the most surprising aspects of bankruptcy is that for many a bankruptcy actually helps them qualify for car loans and mortgages. Not only that, but it helps them obtain the good loans – what we call prime loans with the lowest interest rates – quicker than they would have ever been able to do so had they not filed a bankruptcy.
Now before we discuss how long it takes clients to qualify for the best car loans and mortgages after a bankruptcy, we’ll begin by exploring the more interesting question of how does bankruptcy help clients qualify for such loans.
First and foremost bankruptcy assist clients in obtaining prime rate car loans and mortgages by wiping out the main barrier to obtaining new loans: old debt.
Whether you’re maxed out on you credits cards and are only paying the minimums; falling behind on your payments; or not paying some debts at all; it’s all the same bad news to a potential creditor. Each of these things tell a lender that either you’re close to the limit of not being able to afford additional debt; you’re at the limit; or you’re way beyond it.
And if you can’t afford the old debt you already have, to most lenders you’re too big a risk to give new money to. So either (A) you won’t get a new loan at all, which happens in most cases as the main stream banks – your Chase or Citi Bank – will most likely will refuse to give you the loan at all until you deal with the old debt or pay it off, which may take 10, 15, or more years if you’re only paying the minimums.
Or (B) you may find a lender that is willing to give you a loan even with the old debt hanging around – these are called “sub-prime” lenders – but you’ll be paying enormous amounts of interest on the loan and that can get very expensive.
In fact, I often see interest rates of up to 30% for individuals in this type of debt situation. And that’s shocking, because a $20,000.00 car loan at 25% interest for 5 years costs about $35,000.00. So the interest on the loan costs just about as much as the car. Yet, people are willing to take such loans, because they can’t get a loan anywhere else and they still need the loan for the car or what not.
But after a bankruptcy, this situation is entirely different because after a bankruptcy most clients are completely out of debt. And remember these people who now don’t have debt, still have jobs or other sources of income. So if they take on a new loan, they have the ability to pay it back. Lenders know this. That one of the reasons why our credit score relies so heavily on “debt to credit ratios” and other indicators which tell lenders whether an individual has more debt than they can handle.
Now the second reason why bankruptcy helps clients qualify for good loans is that it gives them the opportunity to rebuild their credit history and credit scores.
Lets face it, when you are struggling with debt you are bound to have a history of late payments, sporadic payments; and even non-payments. You probably have maxed out several of your credit lines. You may even have lawsuits, judgments, garnishments, and bank freezes. All of this makes for an awful credit report and credit score.
After a bankruptcy, most clients have no debt and thus they have an excellent opportunity to rebuild their creditor history and scores. They do this by obtaining a secured credit card; making a charge on it every month, like a 5 or 10 dollars, and paying it off each month on time and in full. By doing this every month for 2-3 years, they create a good credit history. And because credit scores goes back only a few years, this behavior can get you an excellent credit score – even between 700 to 800 – within 2 to 3 years after your bankruptcy has been completed.
When you’re in such debt, this would have never be possible because every month there is something negative being reported to your credit report. So bankruptcy gives many a shortcut to qualifying for such loans because it helps them rebuild their credit scores immediately after their case is completed.
The third reason bankruptcy assists clients in getting prime rate car loans and mortgages is because it gives clients an opportunity to save up for a down payment on these items, which in many cases is a requirement to obtaining a loan these days.
When you’re in debt usually every dollar is devoted to the payment of minimums and necessities. You often don’t have any ability to save up even a dime.
Yet, in today’s changed market conditions, most lenders are no longer giving out “no money down” loans. Instead they require that you have some “skin in the game” to get a good loan. That’s why to get a mortgage most lenders require a down payment from your own money of 20% of the purchase price in order to get approved.
After a bankruptcy, clients have the ability to save up for this down payment because they’re no longer using every penny they have to pay old debt. The money they previous used to pay for the minimums on their credit cards, can now be put aside and slowly but surely built into a sizable down-payment.
So now for the big question, what we’ve all been waiting for…. How long after a bankruptcy does it take to get the good prime rate, lowest interest, car loans and mortgages?
Well, while it is true that almost all clients report getting bombarded with offers for car loans shortly after their bankruptcy case is filed, I generally advise them to first improve their credit scores & build up a down payment before they make such purchases and obtain such loans. This generally takes about 2 years after a bankruptcy. But as I said, if they wanted to get one earlier, most could even shortly after their bankruptcy had been filed. But by putting in the time and really minimal effort, clients can save themselves thousands by building up their credit and down payment and thus qualifying for the lowest interest rate car loans. And we’re talking just about 2 years to do that.
As for home loans and mortgages. Most lenders don’t see bankruptcy as a barrier to approving a mortgage after 2 to 4 years. And that’s fine because, as we stated before, to get a good interest mortgage most lenders require a down payment of 20% of the purchase price and a rebuilt credit history. Both take at minimum of two years to accomplish anyhow.
The irony is is that without a bankruptcy, many clients would not be eligible to obtain low interest car loans or mortgage. But shortly after a bankruptcy, they can get these things.
So if you’re sick of being denied prime rate car loans or mortgage because your old debt is brining you down, call me Attorney Robert J. Skowronski at (773) 283-1600. I’ll help put you in a position that makes you closer to accomplishing this goal, much more quickly and with less effort than you ever thought possible.