Get a Car Loan After Repossession

Many people think that obtaining a car loan after repossession is impossible. While it is undoubtedly difficult, if you take the time to improve your credit score and develop excellent credit habits, it is possible to obtain a reasonable deal on a car loan after a six month to one year period has elapsed.

Steps

Understanding Your Credit Situation

  1. Understand how car repossession damages your credit. Your repossession has a few effects on your credit. Firstly, all information remains on your credit report for seven years, and this means your repossession will remain on your report for that period of time. Secondly, you can expect a drop in your credit score of between 60 and 240 points.[1]
    • The point drop depends largely on your current score. The higher your score, the closer you will be to the 240 point decline. This is because a large adjustment is required to reflect your new level of risk to creditors, from the very low level of risk suggested by your high credit score.
    • While the repossession may remain on your report for seven years, this does not mean you will be unable to get another car loan for seven years. Your ability to get a loan will depend on your credit score, and this will slowly recover as both time passes and as you take proactive steps to reduce your debt and make payments on time.
  2. Obtain copies of your credit reports. Your first step is to examine your current credit situation. This helps you know where you are financially, and it also helps you understand what actions you can take to improve your credit situation. Knowing your credit score also helps you determine how able you are to access car loans, and what you will be paying to access them.[2]
    • Visit annualcreditreport.com to get a free copy of your credit report. There are three credit bureaus that provide credit reports — Equifax, Experian, and TransUnion — and annualcreditreport.com allows you to get one free credit report every 12 months from each credit bureau.
    • You should obtain a report from all three so you can compare to ensure there are no inaccuracies or inconsistencies.
    • Note that U.S. regulations only entitle you to a free credit report, not a free credit score. Your report outlines all your credit history, and your score gives a rating to this history. You will need to pay a small additional fee to see your credit score.
    • You can obtain free reports, as well as scores, from myBankrate.com.
  3. Read a Credit Report for errors or missing information. It is not uncommon for your credit report to have incorrect or missing information. Compare credit reports from all three bureaus with your knowledge of your credit history to ensure there are no errors. An error can reduce your credit rating.
    • You should look for things like old debts you have paid off that are still on your report. Negative items cannot stay on your report for longer than seven years, so if they are there, an error has occur. Pay attention to credit inquiries as well. Every time a lender checks your credit report, it damages your credit, but these inquiries should not remain on your report for more than two years.[3]
    • Also check for information that is not yours.
    • If you notice an issue, contact the credit bureau to have it corrected.
  4. Understand the implications of your credit score and report. Once you have checked your credit score and report, it is important to understand what it means in terms of getting a loan. A repossession often does immediate damage to your credit score, and depending on what your credit score was before the repossession, you may not be in a position to get an affordable loan.
    • If your credit score is 620 or above, typically you will be able to access a car loan, and if your rate is 620 you can expect an average interest rate of 8.18% on a used car.
    • If your score is between 550 and 619 you can expect an average rate of 14.15%, and under 550 you can expect a very high rate of 18.33%.
    • If your credit score is under 550 (or even between 550 and 600), you should seriously consider taking time to rebuild your credit before applying for a car loan. High interest rates will seriously increase your risk of repossession again.
    • Time and good habits can be your best friend in this regard, waiting one year and repaying debt can greatly improve the interest rate you receive.

Rebuilding Your Credit

  1. Understand what goes into a credit score. Understanding what determines your credit score will help you understand how to repair it. There are 5 major areas that affect your credit score.[4]
    • Payment history represents 35% of your score. To improve this area you need to pay your all your bills on time every time.
    • Amount owed represents 30% of your score. This is based on how much you owe as a percentage of your total available credit. Lowering your debt (or boosting your available credit) improves this part.
    • Length of credit history represents 15%. This is why waiting for a period after repossession before reapplying can be helpful.
    • New credit and types credit represent the rest. The more new accounts you open, the worse your score is affected. At the same time, having different types of credit (credit card, line of credit, mortgage, car loan) is good.
  2. Reduce outstanding debts. You will see all your outstanding debt on your credit report. You should start by targeting the most expensive debt, or debt balances that are extremely late. Most often, credit card debt is the first debt that should be addressed because the interest rates are highest.
    • Consider a balance transfer credit card. A balance transfer card allows you to transfer your balance from a current card to a new card, and pay no (or very low) interest for a period of typically one to two years. You can use this period to put any extra money you have on to the card, and it will be paid down quicker due to lower interest rates.[5].
    • Rather than spreading payments across many sources of debt at once, make the absolute minimum payment on most of your debt, and apply all extra to your high-interest credit card debt.
  3. Avoid closing card accounts. Closing a card account may seem like a good idea, but it can actually damage your credit score more. Remember that one factor determining your credit score is how much of your available credit you use. When you close a card, you reduce your available credit, which can damage your score. [6]
    • If you have difficulty not using your credit card, try cutting up the card or leaving it at home. This will allow you to spend only money you have available. This may be challenging, but learning to live without credit can be the single best move you can make to improve your credit score in the short-term.
    • Some people freeze their cards in ice and keep them them in the freezer to make their use more difficult. You won't be able to make an impulse purchase if you have to wait for a block of ice to melt before you can use your card.
  4. Contact your lenders. Many people do not realize that lenders are far more negotiable than they seem. A lender would prefer to give a customer a reduced rate, or more flexible terms if it means both keeping the customer happy and increasing the odds of them recovering their principal and interest. This is especially true if you have been a long-time customer.
    • When you speak to your lender, explain your financial situation, and ask if they can potentially lower your rate for a period while you make regular payments. Make sure to suggest a closed-ended period (like 6 months). If the individual you talk to is unable to help, ask to speak to a supervisor.
  5. Focus on developing a responsible payment history. During the period you are rebuilding your credit, remember that you need to demonstrate exceptional repayment habits. This means prioritizing paying debts on time and in full at all cost, for a 6 month to 1 year period. Consider how you can make changes to your lifestyle to accommodate a greater emphasis on repaying debt.
    • Look carefully at your monthly expenses. Some areas, like entertainment spending and food spending can often be reduced by choosing more affordable forms of entertainment, and focusing on preparing more meals at home. Little things like purchasing a coffee everyday can add up significantly.
    • Also look to your key fixed expenses like your rent, or your phone bill. You could perhaps consider looking to downsize your living situation (if possible for you), or consider downgrading your phone plan to a more basic plan.

Applying for a Car Loan

  1. Repay any outstanding debt on your car loan. If your car is repossessed and the sale value is less than the current value of your outstanding debt, you may owe money even after the repossession. It is important to pay this off quickly and prioritize this debt, as it will reduce the impact to your credit score, remove an outstanding balance from your credit report, and prevent the balance from growing due to interest charges.
    • If you have the monthly cash flow to be able to repay the debt, put as much as possible towards repaying it.
    • If you are unable to repay, consider approaching your lender to discuss a debt settlement or altered repayment plan. A debt settlement involves negotiating a reduced payment amount with your lender. Once paid, this reduced amount should be regarded as "paid in full" on your credit report.
    • Your lender may also be open to a more flexible or adjusted payment plan that involves more time or lower interest charges to reduce your overall monthly payment.
    • Approach your lender to discuss these options. Debt settlement should be the last option you pursue only after other options have been exhausted, because it can have a damaging effect on your credit score. If you have any questions, contact a local credit counselor for aid.
  2. Save a down-payment. Putting down a down-payment can significantly improve your odds of approval and even your interest rate. It demonstrates that you ability to save a down-payment, while also reducing risk for the lender. When you make a down-payment the lender knows that if necessary, they can repossess and sell the car to recoup the amount they loaned, since the loaned amount was less than the value of the car (due to the down-payment).[7].
    • How much down-payment should you consider. To start, any down-payment will help your odds of approval, but many experts recommend 20%. Saving this may take time, but it is worth it, since you will not only be improving your credit over that time period, but you will also be reducing the amount you need to borrow, which can help lower your interest and principal payments.
  3. Consider a co-signer. A co-signer can greatly improve your odds of both approval, and of getting a reasonable rate. Combining a co-signer with a down-payment and months of responsible credit history can help you secure a very affordable loan. A co-signer refers to somebody who can pay the loan if you are unable to.
    • Approach a parent, close friend, or sibling and ask if they can assist. A co-signer should have excellent credit, but also a good and trustworthy relationship with you.
    • Do not involve a co-signer unless you are very serious about responsible re-payment -- your co-signers credit could be damaged if you do not repay.
  4. Spend time shopping for the best deal. When you are ready to approach lenders, to not consider just one. You want to ideally go to multiple lenders to compare interest rates. This can help you ensure you are getting the best rate possible.
    • Remember to be honest and open with lenders about financial history. Never lie, clearly explain why you received a repossession in the past, and what actions you have taken since then to improve your finances.
  5. Choose an affordable vehicle. Remember that the more affordable of a vehicle you choose, the less you will need to borrow, and the more likely you are to get approved for lending. After repossession you should be looking strictly at used vehicles.
    • It is possible to find an excellent deal on a used vehicle if you shop at multiple lots as well as online via sites like Kijiji. Compare several vehicles to try and find a vehicle that has the lowest mileage for the lowest price.
    • Never purchase a car without getting it look at by a mechanic first. You want to ensure there are no outstanding issues that you are taking on when you buy the car. These types of issues can be costly and can add thousands to your purchase price.

Tips

  • Be aware that your down payment and interest rate will be higher when purchasing a vehicle after your repossession.

Warnings

  • Car lots that accept all credit types often offer vehicles that have more than {{safesubst:#invoke:convert|convert}} on them and may be nearing the end of their lifespan. Therefore, it is debatable whether you will get it paid off before needing another vehicle. Choose carefully if you go this route.

Things You'll Need

  • Credit report
  • Car insurance

Related Articles

Sources and Citations

  1. ↑ http://www.bankrate.com/finance/auto/car-repossessed-file-bankruptcy.aspx
  2. ↑ http://blog.credit.com/2014/09/what-credit-score-to-buy-a-car-95781/
  3. ↑ http://www.nolo.com/legal-encyclopedia/how-long-does-negative-information-stay-credit-report.html
  4. ↑ http://www.investopedia.com/articles/pf/10/credit-score-factors.asp
  5. ↑ http://abcnews.go.com/Business/transfer-credit-card-balance/story?id=19581478
  6. ↑ http://www.bankrate.com/finance/credit-debt/tips-for-boosting-your-credit-score-2.aspx
  7. ↑ http://classroom.synonym.com/getting-approved-after-repossession-11183.html
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