Although possibly embarrassing at the personal level, filing for bankruptcy is far from synonymous with financial ruin. With a little care and effort, people facing hard times can rebuild their good reputation and re-establish relationships with lenders.
In fact, bankruptcy is fairly common. Government statistics show that one out of six Canadians will apply for bankruptcy or file a consumer proposal at least once in their lifetimes. With many of them needing to finance their vehicles as they reconstruct their lives, companies have been set up to help them get through this difficult stage with the least possible stress.
Tough but Fair Conditions
Although requirements may be more stringent, with higher interest rates, lenders today are far more willing to work with people struggling through financial quicksands. What a bankrupt borrower doesn’t need is to be turned down by a string of banks and dealerships, as repeated hard queries harm their already-battered credit scores. Although remaining on record for two years, hard queries can impact credit levels for several months.
Instead, reputable lenders have developed soft query techniques that allow them to offer car loans to bad-credit (and even bankrupt) borrowers. At this delicate stage, the most important thing is to avoid incurring further debt or missing payments.
Avoiding ‘Upside Down’ Loans
Unlike their financially savvy southern neighbours, Canadians are five times more likely than Americans to sign up for long-term car loans. In fact, more than half of Canada’s new car loans are for seven years or longer. And this can lead the unwary into a financial trap, called ‘negative equity’ – when a vehicle’s resale value falls below the outstanding amount of the corresponding loan.
In fact, this is why many car owners are left wondering how to cope with high repair costs for vehicles that are rapidly wearing out, while their loans still have several years to run. This nightmare situation is even worse for borrowers who have gone through bankruptcy, as relentless streams of instalment slips and repair bills can drown family budgets in debt – which is why they’re also known as ‘underwater’ loans.
Biting the Credit Score Bullet
Yes, it’s scary – but loan seekers need to need to know their own credit information (free credit reports here). As well as showing them exactly where they stand after bankruptcy is declared, these reports provide weekly updates on score changes, with personalised hints on how to build a better credit, as well as suggestions on financial products tailored to each individual profile.
Borrowers should examine this data very carefully, checking every detail, especially previous auto loans. After all, it’s important to ensure that lenders seeking information on their credit scores have access to accurate overviews of their financial status.
Refinancing Car Loans
Keeping an eye on their credit scores can actually save borrowers money. As they pay off their loans promptly during the first twelve months, their scores start to improve. As a reward, they may be able to refinance their cars at a lower interest rate – which means lower overall outlays on transport.
As auto lenders use heavily weighted credit scoring models, every instalment that’s settled on time is a step towards re-establishing their credit for bankrupt borrowers.
Getting Back into the Black
After a consumer proposal or declaring bankruptcy, it’s important to choose just the right lender, who’s well prepared to go through the extra steps that may be needed, like obtaining information from your trustee. Although a little extra time may be needed, and loan approval will probably not encompass a new or expensive car, the entire process should still be quite painless.
However, smart buyers still pay off these loans as quickly as they can, for the lowest overall costs. This offers them the freedom of choice to upgrade to a newer model without having to roll over an existing loan. At the same time, prompt payments help build up their battered credit scores – and that’s a very welcome bonus during tough times!