What Is a Second Chance Auto Loan?


If you’re in the market for a new or used car but don’t have the best credit, you may be wondering what your options are. Fortunately, a second chance auto loan can help you obtain the funds you need to purchase your vehicle.

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However, before you move forward with this product, it’s a good idea to familiarize yourself with how it works as well as its pros and cons. Here’s everything you need to know about second chance car loans.

What exactly is a second chance car loan?

A second chance car loan is specifically designed for car buyers with low credit who are struggling to get approved for a traditional auto loan. Also known as subprime auto loans or subprime car loans, second chance loans might be worth exploring if your credit score is in the 300 to 600 range.

While some subprime lenders who offer second chance car loans require a minimum income and credit score, others are more lenient and willing to lend to borrowers despite their financial situations.

They might consider other factors like your employment situation and debt-to-income ratio. Most bad credit auto loans are secured by the car itself and have higher interest rates than traditional loans.

These loans also differ from traditional auto loans because the lender may not report your payments to the credit bureaus. This means you won’t be able to use them to build or improve your credit situation. Unfortunately, you’ll get no credit for your on-time payments.

Where to Find Second Chance Auto Loans

Second chance auto loans are not as popular as traditional auto loans. However, if you shop around, you can still find them. Here’s a list of a few places that offer these products.

Car Dealerships

Dealerships with financing departments may include second chance auto loans in their lineup of products. “Buy here, pay here” dealerships are a good place to look as they usually have flexible credit requirements.

They’re also open to working with subprime borrowers or deep subprime borrowers. You might have to call around to various dealerships in your area before you find one that will offer you a second chance auto loan.

Finance Companies

Some finance companies offer second chance auto loans too. Requirements vary greatly, but they’re typically relaxed. As you explore your options, be cautious of any “too good to be true” deals.

You don’t want to fall victim to a car buying scam or yo-yo scam and lose your precious time and money. Don’t forget to do your research and check customer reviews before you fill out an application.

Advantages of Second Chance Auto Loans

For people who have bad credit or a limited credit history and are having trouble getting a traditional auto loan, second chance loans are a great option. Some advantages of second chance auto loans include:

  • You get a car: If you have bad credit, it can be difficult to get approved for a traditional auto loan. Second chance auto loans are specifically designed for people with less-than-perfect credit, so they may be more likely to approve your loan application.
  • Rebuild your credit: By making on-time payments on a second chance auto loan, you can start to rebuild your credit and improve your credit score. This can make it easier for you to get approved for other types of loans and credit in the future.
  • Flexible terms: Second chance auto loans may offer flexible terms, such as longer loan terms or lower monthly payments, to make the loan more affordable for you.

Carefully consider the terms and conditions of a second chance auto loan before you apply. Make sure you understand the interest rate, fees, and repayment terms of the loan and that you can afford the monthly payments.

Disadvantages of Second Chance Auto Loans

If you’re struggling to lock in an auto loan from traditional lenders, second chance auto financing might seem like your only option. But before you sign on the dotted line, make sure you understand the risks of this product, including:

  • Higher interest rates: Subprime car loans feature higher interest rates. This is because lenders take on a higher risk with these loans and fear that you might not be able to repay what you borrow. Keep in mind that a higher average interest rate can cost you hundreds or even thousands of extra dollars over the life of your loan.
  • Larger down payment: Since you’ll be considered a risky borrower, don’t be surprised if a lender asks you to make a bigger down payment. While down payment requirements vary, up to 10% of the purchase price of your car is typical.
  • Deceptive lending practices: Some second chance auto loans are from reputable lenders. Others, however, are from shady lenders who violate laws or engage in deceptive lending practices.

Deciding if a Second Chance Car Loan Right for You

It’s fairly easy to get approved for a subprime auto loan. But just because you can, doesn’t mean you should move forward with it. Ask yourself these questions to help you make an informed decision.

Is the loan affordable?

Second chance car loans are notorious for being expensive. A high annual percentage rate or APR can result in high monthly payments that can take a toll on your budget. Do the math and make sure you can cover the loan costs while still being able to afford your rent, mortgage, utilities, and other bills. You should feel confident that you can pay back your loan.

What is the loan term?

Car dealers often only focus on your monthly payment. If you state you can’t afford a certain payment, they might increase your term to lower it. This can lead to sky-high interest charges and significantly boost your overall cost of borrowing.

Am I getting the best deal?

Of course, you can’t expect to lock in a cheap auto loan if you have bad credit or fair credit. However, some second chance auto loans are more affordable than others, so it’s worth your time to shop around and compare your lending options.

Does my contract make sense?

Read your contract carefully. You should be clear on the important financial details on your auto loan, like the interest rate, interest type (precomputed interest or simple interest), loan term, monthly payment, and additional fees. Furthermore, determine whether you’d be able to pay via direct deposit from your checking account.

Will timely payments be reported to credit bureaus?

It’s not uncommon for second chance auto loan lenders to only report late payments instead of on-time payments to the credit reporting agencies. If you’re trying to establish or boost your credit score, this can be problematic.

Do I need the car immediately?

Unless you don’t have any way to get from point A to point B, it might be worth it to wait and improve your credit. By doing so, you can avoid a second chance auto loan and potentially secure a traditional auto loan with better rates and terms.

Alternatives to Second Chance Car Loans

If you have a subprime credit score, you might think a subprime auto loan is your only option. The good news is there are alternatives you may want to explore.

Review Your Credit Report

Visit AnnualCreditReport.com to pull copies of your credit reports from all three major bureaus. Check each report carefully and dispute any errors or inaccuracies you find with the appropriate bureau.

Get a Cosigner

A cosigner can be a trustworthy friend or family member with a good credit score and stable income. If they cosign an auto loan for you, you may be eligible for a lower interest rate and more favorable terms than you’d be able to secure on your own.

Join a Credit Union

If you’re not already a member of a credit union, you might want to join one. Many credit unions offer auto financing to members with low credit scores. Depending on your situation, you may be able to lock in a lower rate than you would with a second chance auto loan.

Improve Your Credit Scores

Ideally, you’d boost your credit so that you qualify for a traditional car loan from a bank or credit union with a lower interest rate and favorable terms. To do so, pay your bills on time, keep your debt levels low, keep old accounts open, and only apply for credit when you absolutely need to. Trying to achieve stronger credit is your best bet if you don’t need the car as soon as possible.

Save Up for a Cash Purchase

While it may take some time to save up more money, buying a vehicle with cash can save you a lot of money in interest. If you choose a less expensive, used car, this option may be more feasible.

Borrow Money From Friends and Family

You might be able to take out a loan from a friend or family member with low interest or even no interest. Just make sure you outline the terms of the loan in writing and repay what you owe, or you might tarnish your relationship.

How to Get a Second Chance Car Loan

If you decide that a second chance auto loan is right for you, follow these steps.

  • Shop around: It’s important to consider more than one lender. Do your research and look for various car dealers, auto financing companies, and lenders offering second chance auto loans. You may also want to prequalify to receive some offers without any impact to your credit. Compare interest rates, terms, and extra fees to hone in on the ideal option.
  • Apply: Some lenders will let you apply online, but others will require you to visit them in-person. Regardless, you’ll need to provide basic personal and financial information. Furthermore, be prepared to submit documents like a government-issued ID, pay stubs, and bank statements.
  • Review the contract: Upon approval, you should receive a loan contract or loan agreement. Take a close look at it to make sure everything makes sense. If something is unclear, don’t hesitate to reach out to the lender.
  • Repay the loan: Even if the lender doesn’t report on time loan payments to the credit bureaus, you should pay back your loan according to the loan terms in your agreement. Otherwise, you may end up paying an arm and a leg on interest and fees.

Bottom Line

In a perfect world, you’d be able to walk into any dealership or financing company and score an affordable auto loan. But if you have a poor credit history, fair credit, or a past bankruptcy on your record, this may not be realistic.

Before you go ahead and get a second chance loan with a higher interest rate, be sure to consider your alternative options. In the event you do choose a subprime car loan, do your best to pay it back on time.

Anna Baluch
Meet the author

Anna Baluch is a freelance personal finance writer from Cleveland, OH. She enjoys helping people make smart financial decisions.