One major misconception that people have about bankruptcy is that people who file will never be able to secure a personal loan again. We’re here to set the record straight: this is FALSE! It is absolutely possible to take out a personal loan after bankruptcy, whether it be for a new car, a home, or something else. However, as you can imagine, there are many things that need to be considered before doing so to ensure that you are making wise financial decisions that won’t jeopardize the fresh start you were given.
In this blog, we’ll be discussing some of the key considerations you need to make before taking out a loan after bankruptcy, as well as the steps you can take to be financially confident throughout the process.
Understanding The Implications Of Bankruptcy On Your Ability To Get A Personal Loan
Filing for bankruptcy means that your credit score will take a significant hit, and will remain attached to your credit report for up to 10 years. This means that when you attempt to qualify for a personal loan, you will be seen as a high-risk applicant. Being a high-risk applicant doesn’t mean it is impossible for you to qualify for a loan, but it may make things more challenging. Generally, there are five factors that a lender will consider before approving or denying your loan application. They are:
- The type of bankruptcy you filed for. Most people who file for bankruptcy file for either Chapter 7 or Chapter 13. With Chapter 7 bankruptcy, debt is discharged much quicker, because assets may be liquidated to pay a portion of it off. In a Chapter 13 bankruptcy, the debt is paid off over a span of 3-5 years before it is discharged. Therefore, someone who files for Chapter 7 will be able to apply for a loan much quicker than someone who files for Chapter 13. Typically, if you are actively in the bankruptcy process (especially Chapter 13), you will only get approval from your trustee or administrator if the property or services you desire are absolutely necessary and reasonable purchases. In addition, making payments on the new loan must not interfere with your ability to continue making your Chapter 13 payments as planned.
- When you filed for bankruptcy. Again, bankruptcies remain attached to your credit score for several years: 10 years for Chapter 7, and 7 years for Chapter 13. Even if your debt has already been discharged, lenders may be less inclined to approve you if you are still within those windows of time.
- Credit score and history. Similarly, bankruptcy will cause your credit score to drop, and a low credit score usually indicates to a lender that you pose a risk as a loan applicant.
- Income. Having a steady income can bode well for you in the loan application process, but not if you are attempting to purchase something outside of your means, especially if you have already filed for bankruptcy in the past.
- Type of personal loan. There are two types of personal loans an individual can apply for; the first is a secured loan, where the borrower pledges collateral that may be repossessed if they fail to meet their payment obligations. The second type of loan is one that is unsecured, in which the borrower does not have to pledge collateral, but will usually have to pay much higher interest rates. As a result, a person who files for bankruptcy is more likely to be approved for a secured loan because they are less risky for the lender if collateral is involved.
Things To Consider Before Taking Out A Personal Loan After Bankruptcy
Even if you do get approved for a loan during or following bankruptcy, you’ll want to be sure that you are not making a mistake that could potentially lead you back into a dire financial situation. You’ll want to take some time to think through an assortment of issues, and maybe even have a CPA or your bankruptcy attorney advise you on your decision. These issues might be:
- Interest rates – you are likely to pay much higher rates following bankruptcy, which means your payments will also be higher.
- Co-signers – you are more likely to get approved for a loan if someone co-signs with you, but if you default on the payments, you are risking harm to their credit score as well as yours.
- Predatory lenders – following bankruptcy, your financial situation is very vulnerable, and some lenders may try to take advantage of that by offering you loans with no credit checks. While this sounds appealing and ideal for someone whose credit is probably not the best, these lenders often sneak in outrageous interest rates and fees
- Loan scams – if the offer seems too good to be true, it likely is! Some loan scams exist and offer promises of guaranteed approval with no credit checks, but require upfront fees and pressure borrowers with “limited-time” offers. These entities are out to commit identity theft and have no intention of disbursing funds. This is why it is crucial to vet your lenders!
- Car title loans – these are high-interest and high-fee loans that allow you to use your car as collateral and have interest rates that can be as high as 300%. 1 in 5 borrowers have their vehicle repossessed for defaulting on their title loan, making this option one to avoid!
Alternatives To Personal Loans
While personal loans are where most people seek to get money quickly, they are not the only option. Some alternatives to personal loans include:
- 401(k) loan – a loan from your retirement account that may tax you if you don’t repay on time
- Home equity loan – borrowing against the equity in your home
- Home equity line of credit (HELOC) – this is similar to a home equity loan but works more like a credit card in that you may borrow smaller amounts over a period of time
- Payday alternative loans – loans offered by your bank or credit union that may have lower interest rates than regular payday loans
- Secured personal loan – loans that allow you to use collateral and usually have lower interest rates
Navigating The Aftermath Of Bankruptcy
As evidenced, it is not impossible to get a personal loan after bankruptcy, so this shouldn’t be a factor that induces fear over whether filing is the right decision for you. An experienced bankruptcy attorney will be able to discuss all aspects of the bankruptcy process with you, as well as advise you on post-bankruptcy issues you may face. They will be familiar with your unique financial situation and can help you avoid making detrimental mistakes that may lead you back into desperate circumstances, such as taking out the wrong type of personal loan, or the right type at an inappropriate time.
Call The Santos Law Offices, P.A. For Bankruptcy Guidance You Can Trust
Our knowledgeable attorneys can help you make the decision that is right for you and your current financial situation using the experience we have gained over the last 13 years. Call today to schedule your free phone consultation and learn more about our affordable services!