What is a second chance car loan?


If you have a bad credit history and are having trouble getting approved for a car loan, a second chance car loan may be an option. Also known as subprime auto loans, they typically come with higher interest rates, monthly payments, and fees, so consider the pros and cons of these loans before applying.

What is a second chance car loan?

A second chance auto loan is an auto loan available to drivers who have difficulty with credit and cannot be approved for a traditional auto loan. They are also called subprime auto loans or subprime auto loans. Subprime is defined by Experian as a credit score of 600 or less.

The structure of a second chance car loan varies widely from lender to lender. Some lenders require a minimum credit score and may require income. Others may not have a minimum credit requirement, but have an income requirement and limited loan options.

You will almost certainly have to pay a higher interest rate with a second chance car loan. For example, an excellent credit rating earns an average interest rate of 2.93%, while subprime borrowers average 9.75%, according to Experian. This is because lenders rate you as a higher risk of default.

Where to get a second chance car loan

Although not all lenders offer these types of loans, there are a few places where you can find one.


Some dealerships may be willing to offer a second chance loan. In general, “buy here, pay here” (BHPH) bundles are aimed at customers with no credit or low credit.

Check local dealerships in your area to see if any of them have relaxed credit requirements that meet your needs. It’s important to note that today’s car buying market is already tough and your choice will likely be very limited.

Finance companies

There are finance companies that offer second chance auto loans. All lenders are different and they have specific requirements that they ask customers to meet in order to qualify.

However, when researching subprime lenders, beware of offers that sound too good to be true. You could fall victim to a yo-yo scam or other car buying scam and end up losing money, time and the car you are trying to buy. Check customer reviews and carefully review all potential lenders before applying.

What to consider before taking out a second chance car loan

Several factors should be taken into account before taking out a second chance car loan.

Can you afford the monthly payments?

A second chance auto loan has higher monthly payments because the lender assumes you will have a harder time paying them back. This higher risk often results in higher interest rates.

What are the fees?

It is important to investigate all fees, including application fees, financing fees, prepayment fees and monthly account fees. Don’t sign the documents until you know exactly what you’re going to pay.

Will you build credit?

If you are considering buying a car as a first step to improve your credit, a second chance car loan is not the answer. These loans sometimes do not fall under the credit agencies.

What is the amount of a deposit required?

Some lenders require a minimum down payment, which you can usually pay by cashier’s check, cashier’s check or cash. If the down payment required is out of budget, you may need to purchase an alternative.

What is the term of the loan?

Second chance car loans can come with longer terms. Although a longer term means a lower monthly payment, it also means more interest paid over the life of the loan.

Alternatives to second-chance auto loans

If you’ve been turned down for a second chance car loan or can’t get a decent rate, consider other options.

  • Add a co-signer. If you have a co-signer with great credit and a stable income, the lender may approve your application. However, if the loan is not repaid, your co-signer will be responsible for repayment.
  • Check your local credit union. Many credit unions offer auto loans to those with low credit scores. If you are already a member of a credit union, make an appointment to speak with a loan officer. You may be able to get a fair rate on a decent amount.
  • Improve your credit. If you have time to wait, improving your credit can help you find a fair loan. Removing negative items from your credit report can help improve your credit score, but it can take up to 30 days.
  • Buy with cash. This option also forces you not to adhere to a tight purchasing schedule. But if you can afford to save, you can avoid financing and thus avoid application standards and interest.

The bottom line

A second-chance car loan can be a way to get behind the wheel if your credit score is preventing you from being approved for a more traditional car loan. Read the terms carefully and be prepared to spend more money than on a traditional car loan.

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