Dawn wrote in and asked:

I want to but a new car, but I filed for bankruptcy about 7 years ago. Will I have a problem getting a loan? Will I need to make a down payment? My credit score is 730.

Dawn, here’s the answer to your question:

1. Typically, auto lenders will ignore bankruptcies that occurred more than 5 years ago. The only exception is when:

a) You haven’t done anything to “re-establish,” meaning that you haven’t had another installment loan since the bankruptcy was filed. If you’ve bought a car or a home since your bankruptcy – and if you’ve made those payments on time – an auto lender likely won’t care about your 7 year old bankruptcy.

b) If you’re currently “financially maxed out,” meaning that all your credit cards are at the limit and/or your total debt-to-income ratio is high, your previous bankruptcy can make it more difficult to get a loan.

c) If you’ve filed for bankruptcy more than once in the last 10 years, they may look at your application very very carefully.

2. Bear in mind that your local dealership might try and convince you that your previous credit problems require you to pay a higher interest rate. They do this because they can pocket any additional interest they get you to agree to…so before you go to the dealership, my advice is to get a loan (or at least a tentative approval) on your own.

I’d recommend getting an approval from RoadLoans.com or your local credit union before you go car shopping.

3. Most auto loans are approved or declined largely the basis of:

  • the applicant’s credit score
  • the size of the payment relative to your income, also known as your “payment to income” ratio
  • the total amount of debt you have
  • the loan amount relative to the value of the car you’re buying, known as the “loan to value” ratio or LTV

Your score (730) is “A” credit, and assuming that you don’t have a lot of bills or try to buy more car than you can afford, you should be OK to get an approval. The last metric – loan to value – may or may not be OK, it just depends on what you’re buying.

In their perfect little world, lenders want all borrowers to have a loan-to-value ratio of 90% or less. This means that you would need to come up with enough equity to cover all taxes and fees on your purchase plus 10% of the vehicle price, either by putting cash down or trading in a vehicle.

However, most lenders know that people are unwilling to put money down. Therefore, you can often find good terms all the way up to 105% of vehicle value. If you negotiate a good price, you can likely buy a car with no money out of pocket.

Having said that, I always recommend a down payment and a short term financing agreement to go with it. Cars are expensive – the less you pay for financing, the better.

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