Yes! Who you finance with really does matter. But, it depends who… some are better and some are worse than others. If all of your financing is from sub-prime lenders, it’s quite likely that only kind of financing you’ll be able to attract later will also be sub-prime. The good news is that it’s possible to break away from that type of financing, but it may not happen all at once.
Ideally, you would obtain your financing from banks and major mainstream lenders. For example, if you wanted to finance a car, it would be best to get the normal car loan from a major Canadian bank, or right from the automobile manufacturer like Ford Credit Canada, Toyota Credit Canada, Honda Credit Canada, or back in the old days GMAC (General Motors Acceptance Corporation), Chrysler Financial, etc.
But when you’ve got a bankruptcy appearing on your credit report, you can’t be too picky. Having a recent bankruptcy closes a lot of doors when it comes to obtaining any sort of credit or even renting an apartment or getting a job (there’s more on that in other articles).
If you didn’t do any sort of credit rebuilding and didn’t inform yourself of your choices, you might have financed a 5 year old used car at some outrageous interest rate from one of those “buy here pay here” used car lots purporting to be “credit rebuilders.” I do NOT recommend you choose this option unless you are absolutely desperate and can’t wait or can’t get a co-signer. Not that I recommend a cosigner (more on that in just a moment), but if it means getting a new car with mainstream financing as opposed to a 5 year old used car at 35% interest, I’d go for the cosigner.
Recently, I got this question emailed to me:
We have paid 2.5 years on a 4 year car loan through Scotia Bank’s “Dealer Advantage”. The interest rate on the loan was 13% but we had no choice – we needed a car. What I wonder now is, does having Dealer Advantage show on my credit report, vs Scotiabank itself, have any effect on my ability to get credit? We’re almost 4 years post-discharge and the loan will be paid off around the same time the bankruptcy falls off our record… but could having a sub-prime lender on our credit report, even though the payment history will be perfect, affect our ability to get credit even after the bankruptcy has fallen off?
First of all, congratulations on getting a new car after bankruptcy at a somewhat reasonable interest rate (it could have been worse). I also got my “after bankruptcy” car financed through an alternate division of a major bank: TD Financing Services. Despite the name, which may lead you to believe it’s the the financing department at TD Canada Trust, it’s actually a division that does first, second and sometimes third chance financing.
Despite a promising chance from Toyota Credit, due to an impeccable credit history I had with them prior to my bankruptcy (and the lease ending on good terms), I did not get approved by them. The finance manager got me approved with TD Financing Services. It could have been worse… like one of those “buy here, pay here” used car lots that will finance you a 5 year old used car at 35% interest.
Once I’ve had my current car for two years, I will ask around about refinancing at a more mainstream lender and rate, or just trade in the car, if I can get 100% conventional financing. If not, then I too will wait until the bankruptcy falls off my credit report before financing or leasing my next new car. In my case, that will be in just under 3 years (and before the financing term is finished, but the car will still be fairly new and worth more than if I wait longer).
But like we’ve already established, in this economy, it’s not always possible to get mainstream financing from the main lending division at a major Canadian bank or from the financing division of a car manufacturer when you have a bankruptcy on your credit report, or even just blemished credit.
Of course, you could get a cosigner. But I discourage that, because once you have one loan with a cosigner, future lenders may be leery of that and ask you to once again get a cosigner for your next loan. You’ve essentially tainted your credit profile, and believe me, having a recent bankruptcy showing up on your credit report doesn’t help! Of course, the more time that has passed since your discharge, the better. But as long as the bankruptcy still shows up, and even if you have perfect credit since the discharge, you’re still not as well off as your non-bankrupt friends who may have a few minor credit blemishes.
For the same reason having a cosigner on a loan is a bad idea, so is having any sort of sub-prime lender or credit issuer. Future lenders may see that as a warning and be put on notice that you are still not worthy of mainstream financing on your own. They may once again ask for a cosigner, or turn down your application and tell you to go back to your sub-prime lender for your next loan. Of course, they could also approve your loan, which would be great as it will be a stepping stone towards getting mainstream credit.
It’s important to remember that although each lender has their own set of rules, each case is different – but make sure it’s reviewed by a human you can meet in person, not a computer than makes a quick “yes” or “no” decision. The more time that has passed since your bankruptcy discharge, the better. The best situation would be if it has already been 6 years since your bankruptcy was discharged and it no longer shows on your credit reports.
In the case of the reader who emailed in this question, his or her bankruptcy will be dropping off the credit report at about the same time the car loan will be finishing. Of course, we can’t predict what things will be like in 1.5 years, but based on the way things are now, having ScotiaBank’s Dealer Advantage loan may be a bit of a hindrance, but not as bad as one of those “buy here, pay here” so-called credit rebuilder car lots. Or from a true subprime finance company. Be grateful you didn’t go that route.
What’s done is done. You financed through a mainstream bank’s higher risk finance department. Good thing you didn’t go to a true, sub-prime finance company. That would look worse. In the eyes of some lenders, they see different levels of sub-prime loans. And it doesn’t appear that you used a cosigner, so that’s a good thing. Would it have been better to finance through the regular channels at a mainstream bank or from an automobile manufacturer? Sure it would. But we know that in this day and age, that’s not possible for someone with a recent bankruptcy, and without a cosigner, so you did the best you could.
I’m assuming that all payments have been on time, no just with the car, but with everything! Before applying for any credit, be sure to get copies of your credit reports from Equifax and TransUnion. Those are the only two credit reporting agencies in Canada. Equifax is by far the most widely used, but some lenders will use both Equifax and TransUnion, so make sure there are absolutely NO mistakes, inaccuracies, outdated or unverifiable entries on your credit reports. It can take a while to get these corrected (and will almost certainly raise your credit score in the process), so start the process about 6 months before you plan to apply for new credit.
In the case of this reader, since the car loan will be ending about the same time as the bankruptcy should be falling off the credit report, it should be obvious that you want to wait until you’re sure the bankruptcy is no longer showing up. Since I have not yet personally seen my bankruptcy fall of my credit report, I cannot say for sure that it automatically falls exactly 6 months to the day from when your bankruptcy was discharged. It could take a few weeks or months after that date. But what I would do is buy a new copy of both credit reports shortly after the 6 year anniversary of the bankruptcy discharge. If the bankruptcy still reports, mail or fax in a copy of your certificate of discharge and request that your credit report be immediately updated.
Something else worth mentioning is that you really should have more than one type of credit showing up on your credit reports. Credit cards are revolving credit, a car loan is an installment loan. While you still have a bankruptcy appearing on your credit report, you best chance of getting a credit card is a SECURED credit card, like Home Trust Visa or People Trust MasterCard. The longer you use these, the better, but at a minimum, you should have them for at least one year. If you don’t have a secured credit card, get one! The minimum deposit is $500, but that’s so unrealistic and won’t help you that much. You’re better off increasing that to $1000 or $2000 as soon as you can afford to send in a deposit to raise your credit limit. Having a few years of perfect payment history with a credit card and your car loan will go a long way.
And now the big question… will it matter if a sub-prime lender shows up on your credit report AFTER the bankruptcy falls off the credit report? Again, we can’t predict what each lender will be looking for in 1.5 years, but in general, the way things are today, some lenders may be more interested in your payment history than who the previous loan was from. As mentioned before, it could have been worse. There are varying degrees of sub-prime lenders. At least it wasn’t something like “Billy Bob’s Buy Here Pay Here Last Chance Used Car Financing.” Seeing the name “ScotiaBank” will certainly look better, even it’s “ScotiaBank Dealer Advantage.”
I know this is a bit vague, but in the world of credit, that’s the way it is. Often times, people will tell you “just apply and then you’ll find out.” Bad idea. I always recommend asking first before you apply. If the bankruptcy is no longer reporting on your credit report, do not even mention it! But ask the bank manager or loan officer how they look at previous credit and what type of Fico credit score they prefer, even showing them a recent copy in person.
He or she won’t be able to make any guarantees, but if this is someone who has seen a lot of loan applications go through, they should have a pretty good idea of whether or not it will have any bearing on being declined or approved, or even what interest rate you’ll be charged.
It would be a good idea to really shop around for your next car loan. You’ll be looking for who places importance on your past “sub-prime” lender (and don’t call it a sub-prime lender – why draw attention to it)! Make sure to ask more than one person from the same company – either at the same branch/dealership or another one. If you keep getting different answers, continue asking until you get one of the answers consistently. If nobody can answer your question, find another place to go to.
Once you know you’ve found a good place to get your next loan from, inquire about the interest rate. Although the bankruptcy may not appear on your credit report anymore, the non-mainstream loan will. And again, remember there are different levels sub-prime lenders. Some look better than others. At this point, if you find a lender who places less importance on who the lender was, and more on how your payment history is, then you’re all set! Then you may actually be in the position to pick and choose which loan you want based on the best interest rate – something you were not able to do when you had a bankruptcy showing up on your credit report.
Some applications have a question that says “have you EVER filed for bankruptcy?” I recommend filling out applications in person, on paper. Leave that question blank. You’re not lying, you just didn’t answer it. If someone reviews your application in person, you have a chance to explain. But if you fill out a form online, the computer program will make a quick “yes” or “no” decision. And it won’t let you submit an application with an unanswered question. But the good news is that not all applications have this question. If nobody is asking, DO NOT volunteer any information they didn’t ask for, like if you ever declared bankruptcy!
Be sure to ask what their requirements are for length of time at your current address, current job and current income.
Please remember, although I have financed a car after bankruptcy, like these people, it was with the higher risk loan department of a major Canadian bank. Not ideal, but there are worse places to have obtained a loan from. Also note that my bankruptcy has not yet been discharged. Plus, we don’t know what credit policies will be like in 1.5 years, not to mention, every company has different policies. I’ve based my opinions on what information that is current today.
Let’s recap. Make sure you have an impeccable payment history with everyone. Rebuild your credit with one or two secured credit cards so you can have at least one year payment history with your new credit. Having more than one type of credit is good (like revolving credit, installment payments, etc).
Start checking and correcting your credit reports at least 6 months ahead of time. Ideally you should be checking them several times per year, or at a minimum, once per year. Shortly after the 6 year anniversary of your bankruptcy discharge, obtain a new set of credit reports to make sure the bankruptcy is not showing up anymore. If it is, make sure to get that corrected before applying for any credit.
Then, ask around at various banks and car dealerships what your chances are of being financed and at what interest rate. Make sure to speak to a finance manager or someone who is experienced and knowledgeable. Ask around at several places, even the same branch or dealer of the same make of car. See if you get the same answer more than once. Of course, nobody will make any guarantees, but based on their experience, they should be able to give you a good idea of the outcome, without having to apply and incur an inquiry on your credit report. If they can’t or won’t help you with these questions go someplace else.
Good luck and enjoy your new car!