Success! I got a loan on a brand new car after Bankruptcy!

November 4, 2010

I car financed after bankruptcydid it! I just financed a brand new car, with no co-signer! And it’s only been 28 months since my bankruptcy discharge. I’m so excited! I’ve been working hard for the last year rebuilding my credit and finally decided that it was good enough to take the plunge and apply for credit on a major purchase.

Just about anyone can get financed from those “buy here, pay here” last chance used car lots at 30% interest on a 5 year used old car. But, getting credit, without a co-signer, especially an installment loan from a mainstream lender on a brand new car after a bankruptcy in Canada is a huge milestone along the road to rebuilding credit, especially in today’s tougher economy.

It Took A Bit Of Work

It’s not as easy as it used to be to get a loan or lease on a brand new car after bankruptcy in Canada, but it can be done. Like me, you may not end up with the car of your dreams, but rather a respectable car for now on your way up the credit recovery ladder. It’s not just a reliable form of transportation, but another form of credit (installment loan) to report your timely payments to the credit reporting agencies in the journey to rebuilding your credit after bankruptcy.

Although the downturn in the economy may not have hit us as hard as our American neighbours, it’s definitely had an impact here in Canada. Credit guidelines have become much tighter – even since I filed for bankruptcy in September of 2007. I recall researching “credit after bankruptcy” back then and thinking that it may not be too difficult to rebuild my credit. But once I got my automatic discharge nine months later, and became eligible to apply for credit, the credit guidelines had quickly tightened up or became completely unavailable to people with a previous bankruptcy.

Leasing Is Out, Financing Is In

Many automobile manufacturers who offered financing (like Ford Credit) stopped offering leasing, which was, for a long time, one of their most popular programs. For many captive lenders (the credit department of the automobile manufactures), consumer leasing is out and financing is in, like it was up until the late 1980s and early 1990s. Most of the domestic auto makers are not offering leasing anymore, but some of the import names are still offering it.

I remember back in 1994, when I was a strapping young man of 21, Ford Credit Canada was my saviour. Leasing amongst retail car buyers was just catching on and Ford was the most lenient with their credit guidelines. I was easily approved for a 4 year lease on a brand new black 1994 Ford Escort LX. Fast forward to today, and Ford has almost completely dropped leasing, taken a 180 degree turn and is now now promoting financing instead.

It Wasn’t Exactly The Vehicle I Wanted

Sometimes you have to make compromises. Part of the reason I was financing a new vehicle was for the benefit of an installment loan reporting on my credit report. So, when I didn’t get the exact vehicle I wanted, I was OK with that.

For the last few months I had been planning a new car purchase. Having gone back to a front wheel drive vehicle after having two 4×4 SUV’s previously, I decided it was time to get another 4×4 or something with all wheel drive. I had considered saving up until I had enough cash to pay the car outright, but that would take a while. Having a lease or a loan would give me the added benefit of an installment loan reporting to my credit profile and give it that added boost that it needs. Next year I plan on getting a mortgage. I weighed out the pros and cons of a vehicle loan. With my recent pay raise, my yearly income has gone up and should be able to support a monthly car payment. My concern was that when it comes time to apply for the mortgage, I don’t want to be declined for it because I have monthly expenses that are too high.

Originally I was planning on getting my new vehicle in December or January. That would give me time to save up even more money for a down payment, and possibly get a better deal since the winter months are a slower time of year for car sales. But a friend of mine (with immaculate credit) had just been approved for a loan, on the spot, from Toyota Credit Canada through her local Toyota dealer for a 2010 Toyota Matrix XR. I thought that perhaps with all the fuss and negative publicity over the recent recalls on Toyotas, AND being near the end of the 2010 model year, that this would be a good time to get a new car. With Toyota losing ground on its market share over the recently negative publicity regarding the recalls, I thought they may have relaxed some of their credit requirements in an effort to gain more sales.

LOTS Of Research In-Person & By Phone

After countless hours of research by phone and in-person visits over the last 4 to 6 months, I determined that if I was going to be approved for automobile financing, it was either Ford or Toyota. At least they would still consider someone with a previous bankruptcy and not necessarily require a co-signer or a huge down payment like many of their competitors. Although the credit guidelines are much tighter than they used to be, and Ford has dropped their leasing options, they still consider extending credit to people with a bankruptcy appearing on their credit reports. The longer it’s been since the discharge the better. Two years is good, more is better. I was also told that one year of re-established credit is required. And, the bigger the downpayment, the better. That might explain why I was flat out refused any sort of financing from Ford last year in the summer of 2009.

That was a good learning experience. It made me realize that I’d have to work much harder to get any sort of credit now. Having a bankruptcy appearing on your credit report rules you out of a lot of financing options. Over the past year, I’ve been able to correct most of the errors on my credit reports, obtain a secured credit card which reports to the credit bureaus and raise my FICO score to the mid 600s. For someone with a recent bankruptcy, that’s pretty good.

You may recall I mentioned that my two best options for vehicle financing were either Ford or Toyota. That’s because they were the only two who seemed hopeful that I would be approved. I didn’t want a 3 to 5 year old used car financed at 29% interest from one of those “Buy Here, Pay Here” used car lots, or a last chance, sub-prime high risk finance company. Those don’t look good on your credit report, not to mention they’re very expensive.

I Had Previous Good Credit With Toyota Canada Prior To Bankruptcy

I chose to go with Toyota because I had previous credit with them from 2006 and 2007, although in retrospect I keep wondering how things would have turned out if I had tried going to Ford instead. Last year, Ford flat out turned me down, even with a good size down payment.  I’ll never know what could have been because I went to a Toyota dealer.

In 2006, I had a lease from Toyota Credit Canada, and kept it for 18 months, until I was just about to file for bankruptcy. I never missed a payment, and could have kept the leased car through the bankruptcy (since there is no equity in a leased car), but decided I wanted to cut my expenses as much as possible back then. I considered dropping off the car at the dealership and just walking away from it, but discovered that such a thing is called a “voluntary repossession” and would harm my credit even more. Luckily, I found someone to buy the car and pay out the lease, thus relieving me from any obligations to Toyota Credit Canada. After talking with finance managers at several Toyota dealerships and even Toyota Credit Canada, I decided I had a good chance of being approved on a new Toyota because of my previous good credit with them, and a $5000 down payment I had ready to put down on my new car.

Get Something You’ll Like, But Be Realistic

The salesman and finance manager at the Toyota dealership suggested I apply for a modestly priced vehicle. I really wanted something with all wheel drive or 4 wheel drive (once you’ve had it, it’s hard to back to anything else, trust me)! I also wanted a wagon, hatchback or SUV body style as I find them much more practical. The RAV4 seemed to meet all of those requirements, so we submitted my application for one of the last remaining in-stock base model 2010 RAV4’s.

Toyota Credit Canada Declined My Application, TD Financing Services Approved It

Unfortunately, my application was denied. Toyota Credit wasn’t interested in financing me, but TD Financial was, however, for a lower priced vehicle. No problem, it seemed that a base model Matrix AWD (All Wheel Drive) would meet the loan amount I was approved for. After providing all of the required documentation, TD decided that they wanted to shave off approximately $2500 from the amount they approved me for. I didn’t have an extra $2500 to give them and didn’t want the base model Matrix which had no optional features.

End Of Month & End Of Model Year Bargain!

So, I had to select a different vehicle. But, it was my lucky day! By coincidence, I had come at the end of the month in October and the dealership was trying to clear out the last few 2010 model cars, especially the ones that had been sitting around for a while. Sadly, there was nothing in my price range with all wheel drive or 4 wheel drive. But… the dealership did have a vehicle they were willing to give me a significant $6000 discount on… a silver 2010 Corolla Sport with traction control, stability control, antilock brakes and electronic brake force distribution. If that’s too technical, suffice it to say that it’s pretty good! With a good set of winter tires, it should be almost as good as an AWD or 4WD vehicle. The car has just about every option, but is not the colour I wanted or the body style. It’s a sedan, and I was hoping for an SUV, hatchback or wagon. No problem, I’ll just hang on to my trusty old 1998 Ford Windstar minivan a bit longer then and use it whenever I need to haul around large things.

I Had To Put Down More Money

The only problem with the Corolla Sport was that I’d still have to put in another $1000. I had that money, but was counting on using it for other things and keeping a bit of an emergency fund in my chequing account. Considering that the loan would be coming from TD Financial Services at a rather high interest rate (but an open ended loan) and not from Toyota Credit, I seriously considered walking away from the deal and going across the street to the Ford dealer. But if I did that, I’d risk the possibility that Ford would turn me down and my deal with TD on the Corolla may or may not still stand. Plus, it would be another credit inquiry on my credit report. I’d probably be looking at a Ford Focus sedan or Ford Ranger 4×4 pickup. Nice vehicles, but neither one was exactly was I was looking for either.

Lots Of Paperwork Needed

In the end, I decided to provide the Toyota dealer the requested materials such as a letter from my employer, a copy of my Notice of Assessment of last year’s tax return from Revenue Canada and the last 3 months of bank statements. The finance manager sent them in and the deal was approved, pending my contribution of another $1000. We came to a compromise that I would give them $600 instead, but give up the winter tires and rubber floor mats. Fair enough.

Last night, I picked up my brand new silver 2010 Toyota Corolla S. It’s a great car, fun to drive and looks good. It’s not the colour or body style I wanted and I compromised on getting traction control over AWD. But on the flip side, I will get better fuel economy. And I got a screaming good deal. The $6000 price drop seemed too good to be true, but after pricing out that car online on the official Toyota Canada website, I confirmed that they truly were giving me that good of a deal. That helps offset the higher interest rate.

After Bankruptcy, The Financing Is More Important Than The Car

When you’re financing your first car after bankruptcy, it may not be be your dream car, but you’re in it for the financing first and foremost, and a reliable form of transportation. It took a while, but the deal finally got approved. In today’s new credit economy, being just two years past your bankruptcy discharge date is still considered to be “recent” and anyone getting any sort of unsecured credit should be grateful for it – even if it’s not for your dream car or at the best interest rates. Of course, don’t let people take advantage of you either. But if it comes down to it and you absolutely must have a new, or slightly used vehicle because it’s a necessity, you may have to settle for less than ideal terms. But… make it a goal to get mainstream financing on a brand new vehicle in a year or two.

Although this 2010 Toyota Corolla S is not the vehicle I set out to get, I really do like it after all. I may even keep it long term (by long term, I mean 4 years – I get tired of the same car after a while, no matter how nice it is). I was hoping to lease, so that I could get out of this car before it gets to the point of needing regular repairs. But, I may trade it in for something else in a year or two. Four years at the most. Partly to avoid the maintenance costs with a car as it gets older, and partly to get into a loan or lease on a vehicle that better suits my needs, and at lower, more mainstream interest rate.

Installment Loan Reporting To My Credit Report

I want the benefit of this installment loan from TD to report to my credit profile for at least 12 to 24 months. Then I can pay it off in full, as it’s an open ended loan and I have the option of making extra payments or paying it off early. Or, I will trade it in on a new car. With a stronger credit profile and even more time having passed since my bankruptcy discharge, I should be able to pick any vehicle I want and get mainstream financing or leasing.

It’s such a great feeling to be approved for an unsecured loan on a brand new car just a little over two years since my bankruptcy discharge date, especially in this tougher new economy. One milestone accomplished, one more to go! My next goal is to get a mortgage.

If you’ve recently financed, or tried to finance a new car after a bankruptcy in Canada, I’d love to hear about how it went for you! Please contact me.

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