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Your Guide To Applying For An Auto Loan After Chapter 13 Bankruptcy

After you've completed your Chapter 13 bankruptcy plan, you may be worried about taking on new debt. However, if your current vehicle is approaching the end of its lifespan, a new auto loan may be necessary to ensure you have a reliable source of transportation. Here's what you should know about applying for auto loans after your Chapter 13 bankruptcy.

It's Best to Begin Re-establishing Your Credit Before Applying for Your Loan

For some individuals, an auto loan is one option to help re-establish a solid credit history after they end their bankruptcy plan. However, to get the best interest rate on your auto loan, it's best to begin re-establishing credit before you apply for your loan. 

You don't have to do anything fancy to rebuild your credit. Take out a credit card, charge a little bit every month, and pay it off over the course of one to two months. Or, take out a small personal loan and make sure that you make all the payments on time.

Regardless of the type of debt, the goal is to establish a regular history of on-time payments. If you take out a credit card to rebuild your credit, avoid utilizing all your available credit, as a maxed out credit card will lower your credit score. 

If you don't have time to re-establish your credit before applying for your auto loan, know that you can always refinance your auto loan once your credit has improved to procure a better interest rate. 

Save Some Money for a Down Payment

One way to increase your chances of getting approved for an auto loan is have some funds set aside for a down payment. When you have a down payment for a vehicle, you're able to lower the loan-to-value ratio of your vehicle. Loans with lower loan-to-value ratios are less risky for lenders; lenders are more likely to approve these loans, and you may receive a better interest rate.

For example, assume you want to buy a car with a value of $15,000. If you finance the entire amount, your loan-to-value ratio is 100 percent. This makes it extremely likely that you'll owe more than the car is worth at some point during the life of your loan, due to interest expenses and fluctuations in your car's value. 

However, if you have a down payment of $1,500, this results in a loan-to-value ratio of 90 percent ($13,500/$15,000). You're less likely to owe more than the vehicle is worth due to the down payment, and lenders will feel more confident about approving you for a loan.