Can you get a car loan as a discharged bankrupt?
The short answer is, yes it’s possible. Some lenders cater to these borrowers with specialised car loans and processes. They’ve made it easier than you might think to get car finance with bad credit or as a discharged bankrupt.
After all, around 10,000 people enter bankruptcy or a debt agreement (e.g. a Part IX agreement) in Australia every year. That means around 10,000 people will also be exiting their personal insolvency each year. Understandably some of them will eventually need car finance to help get back on their feet.
There are around a dozen of lenders in Australia who consider borrowers in this scenario. Let’s take a look at what they’ll want to see before approving your application.
How to get a car loan if you’ve been bankrupt
If you’re still going through bankruptcy it will be very difficult to get a car loan. It’s generally a good idea to wait 12 months after you’ve been discharged.
This gives you time to start repairing your credit record. With an improving credit score, your options for car finance will increase significantly.
Lenders will want to see that:
- You’re taking steps to improve your credit score and broader financial situation
- The issues that caused your bankruptcy have been resolved
- You have a stable source of regular income
- You are in stable living situation
- You have healthy spending habits
- You will be able to comfortably afford the car loan repayments
What documents will I need when applying for discharged bankrupt car loans?
Lenders will want to see that you’ve gotten yourself into a solid financial position since being discharged from bankruptcy.
They’ll usually ask to see:
- Up to six months of payslips
- Up to six months of bank statements
- Any credit card or other loan statements
- Evidence of any assets you own
If you're not able to provide the standard documentation (e.g. you are self-employed), you could consider a low doc car loan application.
Choosing a car loan when you’ve been bankrupt
Type of car loan
You may find it easier to get approval for a car loan with a vehicle secured against it. This kind of loan involves less risk for the lender as it can reclaim and sell the car if the borrower defaults. Secured car loans usually come with lower interest rates. Even if you’re financing a used car, you should be able to use the car as security.
The loan amount
The key is making sure that you can easily afford to repay the loan. That means being careful not to borrow too much, even if you could afford to borrow more based on your income. Consider contributing a deposit so you’re borrowing less (this lowers your car loan's loan-to-value ratio).
The loan term
A good way to keep your costs down is to choose a shorter loan term. If you can afford higher repayments, a smart approach can be to keep the loan amount low but repay it in a shorter term. Shorter loan terms tend to also be more appealing for lenders who lend to sub-prime borrowers.
Interest rate and fees
Naturally you’ll want to keep these as low as possible. It’s worth exploring any options that will help keep costs down, like applying with the help of a trusted person who can be a guarantor for your loan, or waiting longer if needed before applying and being proactive about repairing your credit score.
Balloon payment or not? A car loan balloon payment means you have lower regular repayment during the loan term, with a large final payment required for you to own the car outright. A balloon payment can make the loan more expensive overall but the flexibility is appealing for some borrowers.
How your rate impacts your car loan repayments
| Finance amount | Monthly repayment - 16% interest | Monthly repayment - 20% interest |
|---|---|---|
$10,000 | $243 | $265 |
$20,000 | $486 | $530 |
$30,000 | $730 | $795 |
$40,000 | $973 | $1,060 |
$50,000 | $1,216 | $1,325 |
$60,000 | $1,459 | $1,590 |
$70,000 | $1,702 | $1,855 |
$80,000 | $1,945 | $2,120 |
$90,000 | $2,189 | $2,384 |
Consider refinancing your discharged bankrupt car loan when your situation improves
Another tip is to think beyond the first car loan you take out after being discharged from bankruptcy or a Part IX debt agreement.
Chances are, even if you shop around for the best deal you can get, a bad credit score will mean the initial interest rate will be quite high.
But after making the repayments on that loan for 12 months, your credit score will likely have improved. That means you might be eligible to refinance the loan to a better rate.
Doing this could save you thousands over the full term of your car finance.
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