How to Refinance a Car After Bankruptcy
OK, you’ve filed bankruptcy. Your credit isn’t great, but you need to buy a car.
So you go to the local car dealership and believe the salesman when he says…
“Buy this car today at this high interest rate and we’ll refinance you in 12 months at the lowest interest rate possible.”
Recovering from bankruptcy is easier than you thought! Time to celebrate, right?
Don’t Believe Everything a Car Salesman Tells You
Every day car dealers repeat the “refinance in 12 months” lie to bankrupt people to push them to purchase cars at extremely high interest rates. You may have financed a car through a high-interest lender knowing that it’s not the best choice. But you probably thought it was your only option at the Vintage cars time and you justified it by thinking you could refinance to a lower interest rate later.
But, when you try to refinance the car months later, you find out the car dealer lied to you.
Best Way to Refinance a Car After Bankruptcy
The first thing you need to determine is whether you qualify to refinance, or if you’re better off just selling or trading-in your car. So let’s start with how much your car is worth.
The biggest mistake most people make when determining the true value of their car is they base their research on the private party value. You need either the trade-in or dealer retail value.
Here’s how to get the value of your car…
Step #1: Go to Edmunds.com. I think Edmunds is one of the best all around automobile sites on the web.
Step #2: When you get on the front page, click on “What’s your car worth?” It’s written in small type and a little tough to find, but it’ll be somewhere on the main page. Or you can go straight to the Used Car Appraiser.
Step #3: Follow the steps and click on the make, model and year of your car.
Step #4: Fill in the vehicle details and any optional equipment your car has.
You’ll see three different values for your car: Trade-In, Private Party and Dealer Retail. The two values you need to pay attention to are Trade-In and Dealer Retail.
Some lenders base their refinancing on the trade-in value and others on the retail value. Ideally, you want to find a lender that uses the retail value, as it’s always higher.
Now that you know the true value of your car, the next step is to call and get your loan payoff from your lender. Loan payoff is what you still owe on the car.Getting a hold of your lender may be tricky. If you’ve defaulted on the loan, your auto lender may cut off all communication with you. So, if you’re having a tough time getting through to your lender, ask for the collections department. They’re your best bet for getting through to a live person.
Ask what the payoff on your car is. If you’re leasing the car, be sure to add the total remaining payments, residual amount and any early termination fees the lender requires so you get the true payoff amount.
Now subtract the value of your car from the payoff amount.
Do you owe less than the car is worth? If so, great…you’ll have more choices and options.
What to do if you owe more than your car is worth
If you owe more on your car than it’s worth (commonly referred to as being “upside down”) you need to dig a little deeper.Now that you know what your car is worth and how much you still owe on it, it’s time to start calling lenders.
Credit unions and banks are the best sources for refinancing your car. Car manufacturers rarely refinance–unless it’s for a luxury car. Just make sure the lender you use reports to all three credit reporting agencies. I talk about the importance of reporting to all three agencies in Life After Bankruptcy Issue #12.
The four most important questions to ask lenders when you’re about to refinance your car
The four big questions to ask each lender are:
1. “Do you refinance based on the trade-in or dealer retail value of the car?”
2. “What percentage over retail/trade-in value will you lend?”
3. “Which credit reporting agency do you use?”
4. “What FICO credit score do I need to be approved for refinancing?”
Keep in mind that lenders who refinance usually will lend no more than 125% of the trade-in or retail value. The average amount a lender will refinance is 110%. This means that if you’re upside down on more than 10% of the value of your car, you’re going to have to come up with the difference before the lender gives you the loan.
If you want to figure out how much you’ll need to borrow from a lender to refinance, download the free Auto Refinance Worksheet(TM) and I’ll walk you through the calculation process.If you’re not in a position to refinance right now, you have another alternative–trade in your current car for another one with a manufacturer’s rebate.
The Power of Manufacturer Rebates
A lot of new car manufacturers offer huge rebates to move new cars out the door. There’s a big incentive for a dealer to sell a new car.You need to locate the highest rebate offer you can find and work toward trading-in your car to eliminate any upside down situation.
Before you go to a new car dealer, go to and look up the rebate and interest rate on every new car and truck a manufacturer offers. This way, if the car salesman isn’t being fair with you (as far as rebates and interest rates are concerned) you’ll know.
Just go to Edmunds.com and click on “New Cars” and then on “Incentives & Rebates” and you’ll get all the information you need.
Some Car Manufacturers Offer Rebates Up to $6,000
It’s not a good situation to be upside down on a high-interest car loan that you need to refinance. However, you can get around it by purchasing a new car with a large rebate. You just use the rebate to offset the amount you owe on your old car.
And if you find a car with a higher rebate (highly recommended), you’re in even better shape. If the rebate is high enough, it can eliminate your negative equity and you can use any remaining amount as part–or maybe even all–of your down payment.
So, if you’re $6,000 or less upside down, you can still come out smelling like a rose if you play your cards right.
Ask the car salesman this magic question…
In addition, don’t be afraid to ask the car salesman this important question: “What car or truck on your lot do you need to sell immediately?”
If you’re in a negative equity situation (meaning you owe more than the car or truck is worth) you need every advantage you can get your hands on. Ask the auto dealer to sell you the oldest car in their inventory.
Car dealers are willing to take a loss on vehicles they’re having a tough time selling because it costs them more to keep these cars on the lot compared to selling them right away at a slight loss. This could mean another $500 to $3,000 discount for you!
You still need a high enough score to qualify
Just like every other major purchase you make on credit, you need to meet a minimum FICO score requirement in order to qualify for a loan from the lender…especially if the lender is a bank or credit union.
For instance, on new cars one manufacturer requires a FICO score of:
680 and above to get a 125% loan
650 to 679 to get a 115% loan
620 to 649 to get a 110% loan
And a FICO score below 620 gets you only a 100% loan
Any loan over 100% will go toward paying off what you owe on the car you’re trading in.
Bottom line: the higher your FICO credit scores are–the more options you’ll have and better terms you’ll receive. That’s why we’re always preaching to increase your credit scores.